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 $38. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $2800 per ball, of which 74% is direct labor cost Last year, the company sold 30,000 of these balls, with the following results: Sales (30,000 balls) Variable expenses Contribution margin Fixed expenses Net operating income $1,140,000 840,000 300,000 210,000 $ 90,000 Required: . Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year's sales level. 2. Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3.00 per ball. If this change takes place and the selling price per ball remains constant at $38.00, what will be next year's CM ratio and the break-even point in balls? 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, $90,000, as last year? 4. Refer again to the data in (2) above. The president feels that the company must raise the selling price of its basketballs. H Northwood Company wants to maintain the same CM ratio as last year (as computed in requirement 1a), what selling price per bal must it charge next year to cover the increased labor costs? 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 26.32%, but it would cause fixed expenses per year to double. If the new plant is built, what wnuld he the romnanv's now CM ratin and now hreak.aven noint in halle?

Explanation / Answer

1-a. Compute the CM ratio and the break-even point in balls. CM Ratio = Contribution Margin/Sales = $300,000/$1,140,000 26.32% BEP(Balls) = FC/(SP-VC) = $210,000/($38 - $28) $21,000.00 balls 1-b. Compute the the degree of operating leverage at last year Degree of operating leverage = CM/ NOI = $300,000/$90,000 3.33 2) Due to an increase in labor rates, the company estimates that variable costs will increase by $3 per ball next year. If this change takes place and the selling price per ball remains constant at $38, what will be the new CM ratio and break-even point in ball Sales (30,000 balls) $1,140,000.00 Variable expenses ($28 + 3) x 30000 $930,000.00 Contribution margin $210,000.00 Fixed expenses $210,000.00 Net operating income $0.00 CM Ratio = Contribution Margin/Sales = $210000/$1,140,000 18.42% BEP(Balls) = FC/(SP-VC) = $210,000/($38 - $31) 30,000 balls 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, $90000, as last year?(Do not round intermediate calculations. Round your answer to the nearest whole unit.) BEP(Target Profit) = FC + TP/(SP-VC) BEP(Target Profit) = $210000+$90000/($38 - $31) 42857 Balls 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.) P = $31 + 0.1842P .8158 P = $31 P = $31/.8158 $38.00 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 26.32%, but it would cause fixed expenses per year to increase by double. 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.) Sales (30,000 balls) $1,140,000.00 Variable expenses (28 x (1-26.32% ) x30000 $618,912.00 Contribution margin $521,088.00 Fixed expenses = $210,000 x 2 $420,000.00 Net operating income $101,088.00 CM Ratio = Contribution Margin/Sales = $521,088/$1,140,000 45.71% BEP(Balls) = FC/(SP-VC) = $420,000/($38 - ($28 x (1-26.32%)) 24,180.18 balls 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, $90000, as last year? (Do not round intermediate calculations.) BEP(Target Profit) = FC + TP/(SP-VC) BEP(Target Profit) = $420000+$90000/($38 - $28 x (1-26.32%) 29,362 Balls b1. Assume the new plant is built and that next year the company manufactures and sells 30,000 balls (the same number as sold last year). Prepare a contribution format income statement (Do not round your intermediate calculations.) Northwood Company manufactures Sales (30,000 balls) $1,140,000.00 Variable expenses (28 x (1-26.72% ) x30000 $618,912.00 Contribution margin $521,088.00 Fixed expenses = $210000 x 2 $420,000.00 Net operating income $101,088.00 b-2. Compute the degree of operating leverage. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Degree of Operating Leverage = CM/ NOI= $521088/$101,088 5.15

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