Northwood Company manufactures basketballs. The company has a ball that sells fo
ID: 2484731 • Letter: N
Question
Northwood Company manufactures basketballs. The company has a ball that sells for $37. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $25.90 per ball, of which 70% is direct labor cost.
Last year, the company sold 43,000 of these balls, with the following results:
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
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 $1.85 per ball next year. If this change takes place and the selling price per ball remains constant at $37.00, 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.)
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, $199,800, 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.)
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 92%. 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.)
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, $199,800, as last year? (Do not round intermediate calculations.)
Assume the new plant is built and that next year the company manufactures and sells 43,000 balls (the same number as sold last year). Prepare a contribution format income statement. (Do not round your intermediate calculations.)
Compute the degree of operating leverage. (Do not round intermediate calculations and round your final answer to 2 decimal places.)
Last year, the company sold 43,000 of these balls, with the following results:
Sales (43,000 balls) $ 1,591,000 Variable expenses 1,113,700 Contribution margin 477,300 Fixed expenses 277,500 Net operating income $ 199,800 1-a.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
1-b.Compute the the degree of operating leverage at last year’s sales level. (Round your answer to 2 decimal places.)
2.Due to an increase in labor rates, the company estimates that variable expenses will increase by $1.85 per ball next year. If this change takes place and the selling price per ball remains constant at $37.00, 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.)
3.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, $199,800, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole unit.)
4.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.)
5.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 92%. 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.)
6.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, $199,800, as last year? (Do not round intermediate calculations.)
b-1.Assume the new plant is built and that next year the company manufactures and sells 43,000 balls (the same number as sold last year). Prepare a contribution format income statement. (Do not round your intermediate calculations.)
b-2.Compute the degree of operating leverage. (Do not round intermediate calculations and round your final answer to 2 decimal places.)
Explanation / Answer
1-a)
Contribution margin ratio = Contribution margin/Sales*100
= $477,300/$1,591,000*100
= 30%
Break-even point in balls = Total fixed cost/Contribution margin per unit
Contribution margin per unit or ball = Total contribution margin/Number of balls sold
= $477,300/43,000 balls
= $11.10 per ball
Break-even point in balls = $277,500/$11.10 per ball
= 25,000 balls
1-b)
Degree of operating leverag = Contribution margin/Operating income
= $477,300/$199,800
= 2.39
2)
Current variable cost per unit = Total variable cost/Number of balls sold
= $1,113,700/43,000 balls
= $25.90
Revised variable cost per ball = $25.90 + $1.85
= $27.75
Revised contribution margin per ball = Selling price per ball - Revised variable cost per ball
= $37 - $27.75
= $9.25 per ball
Contribution margin ratio = Contribution margin per ball/Selling price per ball*100
= $9.25/$37*100
= 25%
Break-even point in balls = Total fixed cost/Revised contribution margin per unit
= $277,500/$9.25 per ball
= 30,000 balls
3)
Balls to be sold to earn same profit = Fixed cost + Desired profit/Contribution margin per ball
= $277,500 + $199,800/$9.25 per ball
= 51,600 balls
4)
Required sales in dollars = Fixed cost + Desired profit/Same CM ratio
= $277,500 + $199,800/0.25
= $1,909,200
Selling price per ball = $1,909,200/43,000 balls
= $44.40 per ball
Note: Please post the remaining sub parts seperately as per Chegg guidelines, four sub parts are answered.
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