Northwood Company manufactures basketballs. The company has a ball that sells fo

Question

Northwood Company manufactures basketballs. The company has a ball that sells for $35. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $24.50 per ball, of which 70% is direct labor cost Last year, the company sold 57,000 of these balls, with the following results: $ 1,995,000 1,396,500 Sales (57,000 balls) Variable expenses Contribution margin 598,500 493,500 Fixed expenses Net operating income $ 105,000 Required: 1-a. Compute the CM ratio and the break-even point in balls. (Do not round intermediate calculations.) CM Ratio 70 % Unit sales to break even 47,000 balls 1-b. Compute the the degree of operating leverage at lastyear's sales level. (Round your answer to 2 decimal places.) Degree of operating

Explanation / Answer

Amount $ Sales 1995000 Variable Expenses 1396500 Contribution Margin 598500 Fixed Expenses 493500 Net operating Income 105000 1-a Contribution Margin ratio=Contribution margin/Sales 598500/1995000 0.3 Unit sales at Brekeven Fixed Expenses/Contribution per unit 493500/(35-24.5) 47000 1-b Degree of operating leverage=Contribution Margin/Net Operating Income 598500/105000 5.7 2 Sales 1995000 Sales price will also increase by $3.5 new price @38.5 2194500 Variable Expenses @28 1596000 Variable Expenses @28 1596000 Contribution Margin 399000 Contribution Margin 598500 Fixed Expenses 493500 Fixed Expenses 493500 Net operating Income -94500 Net operating Income 105000 Contribution Margin ratio=Contribution margin/Sales 399000/1995000 0.2 Unit sales at Brekeven Fixed Expenses/Contribution per unit 493500/(35-28) 70500 units 3)Sales=Fixed Cost+desired profit/CM Ratio 493500+105000/.2 2992500 No. of balls 2992500/35 85500 Ans Ans 4 Sales price will also increase by $3.5 new price @38.5 2194500 Variable Expenses @28 1596000 Contribution Margin 598500 Fixed Expenses 493500 Net operating Income 105000 Selling Price=$38.5

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