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 $42 At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling S25.20 per ball, of which 60% is direct labor cost. Last year, the company sold 60,000 of these balls, with the following results: Sales (60,000 balls) Variable expenses $2,520,000 1,512,000 1,008,000 Contribution margin Fixed expenses 840,000 Net operating income S 168,000 Required: 1-a. Compute last year's CM ratio and the break-even point in balls. (Do not round intermediate calculations.) CM Ratio Unit sales to break even balls 1-b. Compute the the degree of operating leverage at last year's sales level (Round your answer to 2 decimal places.) egree of operating Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3.36 per ball. If this change takes place and the selling price per ball remains constant at S42 00, what will be next year's CM ratio and the break-even point in balls? (Do not round 2. intermediate calculations.) CM Ratio Unit sales to break even balls

Explanation / Answer

Sale Price 42.00 Variable Expense 25.20 Direct Labor Ex 15.12 (25.20*60%) Unit Sold LY 60000 Sales 2520000 Variable Expenses 1512000 Contribution Margin 1008000 Less: Fixed Exp 840000 Net Operating Income 168000 1-A CM Ratio: Contribution Margin 1008000 Sales 2520000 CM Ratio 40.00% (CM/Sales) Break Even Units: Fixed Cost 840000 CM Ratio 40% BEP Sales in Value 2100000 (FC/CM Ratio) BEP Sales in Units 50000 (BEP in Value/SP) 1-B DOPL: Contribution Margin 1008000 Net Operating Income 168000 DOPL: 6.00 (CM/NOI) 2 Current Revised Sales 42.00 42.00 Variable Expenses 25.20 28.56 (+3.36) Contribution Margin 16.80 13.44 CM Ratio 40.00% 32.00% (CM/Sales) Break Even Units: Fixed Cost 840000 840000 BEP Sales in Value 2100000 2625000 (FC/CM Ratio) BEP Sales in Units 50000 62500 (BEP in Value/SP) 3 Desired Profits 168000 Add: FC 840000 Required CM 1008000 CM Ratio 32.00% Required Sales in Value 3150000 Required Sales in Units 75000 (Value/42) 4 Revised Variable Exp 28.56 CM Ratio 40.00% Expense (1-40%) 60% Sales Price 47.60 (28.56/60%) 5 Use of Automated Machines: Sales Price 42.00 Variable Expenses 15.12 (25.20*60%) Fall by 40%; Remain 60% CM 26.88 FC 15,79,200 (840000*188%) CM Ratio: 64.00% (26.88/42) BEPin Value 2467500 (FC/CM Ratio) BEPin Units 58750 (BEP in Value/SP) 6-A Desired Profits 168000 Add: FC 15,79,200 Required CM 1747200 CM Ratio: 64.00% Required Sales in Value 2730000 (ReqCM/CM Ratio) Required Sales in Units 65000 (Value/42) 6-B1 Units Sold 60000 Sales 2520000 (60000*42) Variable Expenses 907200 (60000*15.12) Contribution Margin 1612800 Less: Fixed Exp 15,79,200 Net Operating Income 33600 6-B2 DOPL: Contribution Margin 1612800 Net Operating Income 33600 DOPL: 48.00 (CM/NOI)

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