Northwood Company manufactures basketballs. The company has a ball that sells fo
ID: 2492221 • Letter: N
Question
Northwood Company manufactures basketballs. The company has a ball that sells for $30. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $18.00 per ball, of which 60% 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.)
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 $2.40 per ball next year. If this change takes place and the selling price per ball remains constant at $30.00, 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, $120,000, 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.)
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 40%, but it would cause fixed expenses per year to increase by 80%. 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, $120,000, as last year? (Do not round intermediate calculations.)
Assume the new plant is built and that next year the company manufactures and sells 51,000 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.)
Northwood Company manufactures basketballs. The company has a ball that sells for $30. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $18.00 per ball, of which 60% is direct labor cost.
Explanation / Answer
Answer:1-a
Calculation of CM ratio:
CM ratio = (Unit sale price - Unit variable cost)/Unit sale price
CM ratio = ($30 - $18)/$30
= $12/$30
= 0.4 or 40%
Calculation of BEP:
Let Q are the required balls to break even.
Q = Fixed expenses / (unit sale price - unit variable cost)
Q = $492000/ ($30 - $18)
Q = $492000 / $12
Q = 41000 balls
Therefore, BEP in unit sales is 41000 balls.
Answer:1-b
Degree of operating leverage = Contribution margin/ Net operating income
Degree of operating leverage = $612000/$120000 = 5.10
Answer: 2
New variable cost per unit = $18 + $2.40 = $20.4
Calculation of New CM ratio:
CM ratio = (Unit sale price - Unit variable cost)/Unit sale price
CM ratio = ($30 - $20.4)/$30
= $9.60 / $30
= 0.32 or 32%
Calculation of New BEP:
Let Q are the required balls to break even.
Q = Fixed expenses / (unit sale price - unit variable cost)
Q = $492000/ ($30 - $20.4)
Q = $492000 / $9.60
Q = 51250 balls
Therefore, BEP in unit sales is 51250 balls.
Answer:3
BEP in balls in order to earn targeted net operating income of $120000 is:
BEP = (Fixed expenses + Required net operating income)/ (unit sale price - Unit variable cost)
BEP = ($492000 + $120000)/ ($30 - $20.40)
BEP = $612000 / $9.60
BEP = 63750 balls
Therefore, 63750 balls will have to be sold next year to earn the same net operating income, $120,000, as last year.
Answer:4
According to the conditions,
CM ratio = 40%
New variable cost = $20.40
Let selling price per unit be $Y.
Now, applying the CM ratio formula:
CM ratio = (unit sale price - unit variable cost)/Unit sale price
0.40 = ($Y - $20.40)/ $Y
$0.4 Y = $ Y - $20.40
$0.6 Y = $20.40
Y = $20.40/ $0.6
Y = $34
Therefore, selling price @ $34 per ball it must charge next year to cover the increased labor costs.
Answer:5
Calculating new variable cost per unit:
Original variable cost per unit ......................... $18
Less: 40% decrease ($18 * 40%) .................. $7.20
New variable cost ............................................$10.80
Calculating new fixed expenses per year:
Original fixed expenses...................................$492000
Add: 80% increase ($492000*80%)................$393600
New fixed expenses.........................................$885600
Calculation of New CM ratio:
CM ratio = (unit sale price - Unit variable cost)/ Unit sale price
CM ratio = ($30 - $10.80)/ $30
CM ratio = $19.20 / $30
CM ratio = 64%
Calculation of new BEP:
BEP = Fixed expenses/ (unit sale price - Unit variable cost)
BEP = $885600 / ($30 - $10.80)
BEP = $885600/$19.20
BEP = 46125 balls
Therefore, if the new plant is built, CM ratio is 64% and new BEP is 46125 balls.
Answer:6-a
BEP in balls in order to earn targeted net operating income of $120000 is:
BEP = (Fixed expenses + Required net operating income)/ (unit sale price - Unit variable cost)
BEP = (885600 + $120000) /($30 - $10.80)
BEP = $1005600 / $19.20
BEP = 52375 balls
Therefore, if the new plant is built, 52375 balls it will have to sold next year to earn the same net operating income, $120,000, as last year.
Answer: 6-b-1
Answer: 6-b-2
Degree of operating leverage = Contribution margin/ Net operating income
Degree of operating leverage = $979200 / $93600 = 10.46
Northwood Company Contribution format income statement Sales (51000 balls) $ 15,30,000.00 Less: variable expenses (51000 balls *$10.80 per ball) $ 5,50,800.00 Contribution margin $ 9,79,200.00 Less: fixed expenses $ 8,85,600.00 Net operating income $ 93,600.00Related Questions
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