Northwood Company manufactures basketballs. The company has a ball that sells fo
ID: 2586331 • Letter: N
Question
Northwood Company manufactures basketballs. The company has a ball that sells for $26. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $16.00 per ball, of which 62% is direct labor cost.
Last year, the company sold 30,000 of these balls, with the following results:
1. COMPLETE/CORRECT 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. (Round "Unit sales to break even" to the nearest whole unit and other answers to 2 decimal places.)
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 $26.00, what will be next year's CM ratio and the break-even point in balls? (Round "CM Ratio" to 2 decimal places and "Unit sales to break even" to the nearest whole unit.)
3. Refer to the data in Required (2). 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? (Round your answer to the nearest whole unit.)
4. Refer again to the data in Required (2). 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 (as computed in requirement 1a), what selling price per ball must it charge next year to cover the increased labor costs? (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 38.46%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company’s new CM ratio and new break-even point in balls? (Round "CM Ratio" to 2 decimal places and "Unit sales to break even" to the nearest whole unit.)
6. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $90,000, as last year? (Round your answer to the nearest whole unit.)
.............
7. 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 and Compute the degree of operating leverage. (Round "Degree of operating leverage" to 2 decimal places.)
Sales (30,000 balls) $ 780,000 Variable expenses 480,000 Contribution margin 300,000 Fixed expenses 210,000 Net operating income $ 90,000Explanation / Answer
Answer:
1
a)
CM ratio (Contribution Margin ratio)
= (Sales – Variable expenses)/Sales
= (780,000 – 480,000)/780,000
= 38.46%
b)
Break-even point in unit sales
= Fixed expenses/Contribution Margin per unit
= 210,000/10
= 21,000 units
c)
Operating leverage
= Contribution Margin/Net operating income
= 300,000/90,000
= 3.33
__________________________________________________
2
New Contribution Margin ratio
= (Sales – New Variable expenses)/Sales
= (780,000 – 570,000)/780,000
= 26.92%
Break-even point in unit sales
= Fixed expenses/Contribution Margin per unit
= 210,000/(10-3)7
= 210,000/7
= 30,000 units
______________________________________________-
3
Net operating income = Sales – Variable expenses – Fixed expenses
90,000 = (26*units) – (19*units) – 210,000
300,000 = 7*units Units
= 42,857
Balls will have to be sold next year are 42,857 units
____________________________________________________
4
CM ratio = ((Sales Price*units) – New Variable expenses)/(Sales Price*units)
Give Sales Prices = X
0.3846 = ((30,000X) – 570,000)/(30,000X)
11,538X = 30,000X – 57,000
570,000 = 18,486X
X = 30.87
_______________________________________________
5
Contribution Margin ratio = (Sales – Variable expenses)/Sales
= (780,000 – 295392)/780,000
= 0.6213
=62.13%
Break-even point in unit sales
= Fixed expenses/Contribution Margin per unit
= 420,000/16.15
= 26,006 units
______________________________________
6
Net operating income = Sales – Variable expenses – Fixed expenses
90,000 = (26*units) – (9.85*units) – 420,000 Units
= 31,579 units
Sales (30,000 balls)
780000
Variable expenses
295500
Contribution margin
484500
Fixed expenses
420,000
Net operating income
64,500
____________________________
7
Operating leverage = Contribution Margin/Net operating income
= 484500/64500
= 7.51
Sales (30,000 balls)
780000
Variable expenses
295500
Contribution margin
484500
Fixed expenses
420,000
Net operating income
64,500
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