Northwood Company manufactures basketballs. The company has a ball that sells fo
ID: 2428006 • Letter: N
Question
Northwood Company manufactures basketballs. The company has a ball that sells for $36. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $25.20 per ball, of which 70% is direct labor cost.
Compute the CM ratio and the break-even point in balls. (Do not round intermediate calculations. Round up your final break even answers to the nearest whole number.)
CM Ratio ____%
Unitsales to brealdown ______ balls
Compute the the degree of operating leverage at last year’s sales level. (Round your answer to 2 decimal places.)
Degree of Operating Leverage _____
Due to an increase in labor rates, the company estimates that variable expenses will increase by $1.80 per ball next year. If this change takes place and the selling price per ball remains constant at $36.00, what will be the new CM ratio and break-even point in balls? (Do not round intermediate calculations. Round up your final break even answers to the nearest whole number.)
CM Ratio_____%
Unit Sales to break even _____ balls
Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income, $108,000, as last year?(Do not round intermediate calculations. Round your answer to the nearest whole unit.)
Refer again to the data in (2) above. The president feels that the company must raise the selling price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year, what selling price per ball must it charge next year to cover the increased labor costs? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Selling Price______
Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 20%, but it would cause fixed expenses per year to increase by 70%. If the new plant is built, what would be the company’s new CM ratio and new break-even point in balls? (Do not round intermediate calculations. Round up your final break even answers to the nearest whole number.)
CM Ratio_____%
Unit Sales to break even _____ balls
Refer to the data in (5) above.
If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $108,000, as last year? (Do not round intermediate calculations.)
Number of balls_____
Assume the new plant is built and that next year the company manufactures and sells 52,000 balls (the same number as sold last year). Prepare a contribution format income statement. (Do not round your intermediate calculations.)
Northwood Company
Contribution Income Statement
Compute the degree of operating leverage. (Do not round intermediate calculations and round your final answer to 2 decimal places.)
Northwood Company manufactures basketballs. The company has a ball that sells for $36. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $25.20 per ball, of which 70% is direct labor cost.
Explanation / Answer
Answer to 1.a.
Contribution Margin Ration = Contribution Margin/Sales price per unit * 100
Contribution margin= Sales price- Variable expenses = 36-25.20= 10.8
Contribution Margin ratio= 10.8/36*100
Contribution Margin ratio = 30%
Break Even Point is where the sales amount is equal to fixed cost plus Variable cost
Let x be the breakeven point(in unit)
36x = 453600 + 25.2x
10.8x = 453600
x = 42000 units
2. DOL = contribution margin/operating income
= 561600/108000
= 5.2
Contribution Margin Ration = Contribution Margin/Sales price per unit * 100
Contribution margin= Sales price- Variable expenses = 36-27= 9
Contribution Margin ratio= 9/36*100
Contribution Margin ratio = 25%
Break Even Point is where the sales amount is equal to fixed cost plus Variable cost
Let x be the breakeven point(in unit)
36x = 453600 + 27x
9x = 453600
x = 50400 units
3. Let x be th number of units to earn $108000 net income after an increase of $1.8 in variable cost.
Contribution margin after an increase of $1.8 in variable cost is $9(as calculated above)
Net Income = Contribution margin - Fixed Cost
108000 = 9x - 453600
561600 = 9x
x = 62400 units
4. Let x be the selling price to cover increase in variable cost.
CMR = 30%
(x-27)/x*100 = 30
x = 38.57
5. New variable cost = 25.2*(1-0.2) = 20.16
New fixed cost = 453600 * (1+0.7) = 771120
Seeling cost = 36
Contribution margin = 36-20.16 = 15.84
CMR = 15.84/36*100 = 44%
Let x be the Breakeven Point (in unit)
Sales = fixed + variable
36x = 771120 + 20.16x
15.84x = 771120
x = 38250 units
6.a. Let x be the units to earn same net operating income.
Net Income = Contribution margin - fixed cost
108000 = (36-20.16)x - 771120
879120 = 15.84x
x = 55500 units
6.b-1.
823680
6.b-2.DOL=contribution/operating income
=823680/52560
= 15.67
Sales(52000 balls) 1872000 Variable expense 1048320 Contribution Margin823680
Fixed Cost 771120 Net Income 52560Related Questions
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