Northwood Company manufactures basketballs. The company has a ball that sells fo
ID: 2493147 • 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. Last year, the company sold 52,000 of these balls, with the following results: Sales (52,000 balls) $ 1,872,000 Variable expenses 1,310,400 Contribution margin 561,600 Fixed expenses 453,600 Net operating income $ 108,000 Required: 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 $1.80 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.) 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, $108,000, 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 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.) 6. Refer to the data in (5) above. a. 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.) b-1. 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.) 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 = Selling Price per unit - variable cost per unit
selling price per unit
= 36-25.20 /36
= 30%
Break even Point in balls = Annual Fixed Costs / Contribution margin per unit
= 453,600 / 36-25.20
= 42,000 units
1-b)
Degree of Operating Leverage = Net Operating Income / Sales
= 108,000 / 1,872,000
= 5.76%
2 )
contribution margin ratio depending on the revised variable cost =
selling price - revised variable cost /selling price
= 36- 27/36
= 25%
Revised break even point in balls = Annual fixed costs /contribution per unit
= 453,600/ 36-27
= 50,400 units
3 )
Number of balls to be sold can be calculated by using the below formula
number of desired balls = ( Annual Fixed costs + Desired Operating Income) / contribution per uint
= (453600 + 108000)/9
= 62,400 units
4 )
Revised Selling Pfrice = Revised Variable cost per unit / 1- revised contribution margin ratio
= 27/1-25%
= 36
5 )
Revised Contribution margin ratio = (36 - (25.20-20%) ) / 36
= 44%
break even units = (453600 + 70%)/ 36-25.20
= 71,400
5a) revised number of new sales = (771120 + 108000)/ 10.8
= 81,400 units
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.