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 $32. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $22.40 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.)

Compute the the degree of operating leverage at last year’s sales level. (Round your answer to 2 decimal places.)

Due to an increase in labor rates, the company estimates that variable expenses will increase by $1.60 per ball next year. If this change takes place and the selling price per ball remains constant at $32.00, what will be the new CM ratio and break-even point in balls? (Do not round intermediate calculations.)

Northwood Company manufactures basketballs. The company has a ball that sells for $32. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $22.40 per ball, of which 70% is direct labor cost.

Explanation / Answer

Answer 1-a CM Ratio = (sales-variable expense)/ sales Sales = $ 1664000 Variable Expenses= $ 1164800 CM Ratio = ($ 1664000-$ 1164800)/ $1664000 CM Ratio = $ 499200/$ 1664000 CM Ratio = 0.3 Breakeven point = Fixed expense/contribution margin Fixed expenses =$ 422400 Contribution Margin= $ 499200 Breakeven point = $422400/$499200 Breakeven Point=0.846154 Breakeven point in balls = 0.846154* $32 Breakeven point in balls = 27 Balls 1-b Degree of operating leverage (DOL) = contribution margin/operating income Contribution margin = $ 499200 Operating Income = $ 76800 DOL = $ 499200/$ 76800 DOL= 6.5 2 Current varible expenses per unit = $1164800/52000 balls Current varible expenses per unit = $22.4 per ball Increase in labour rate = $1.60 per ball Revised variable expenses = $22.4+$1.60 Revised variable expenses = $24 New CM ratio = (sales - variable expense)/sales New CM ratio = ($32-$24)/$32 New CM ratio = 0.25 New Breakeven point = Fixed expense/contribution margin Contribution margin = $8*32000 balls Contribution margin = $256000 New Breakeven point = $422400/$256000 New Breakeven point = 1.65 New Breakeven point in balls = 1.65*$32 New Breakeven point in balls = 52.8=53 balls

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