Northwood Company manufactures basketballs. The company has a ball that sells fo
ID: 341362 • Letter: N
Question
Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $15 per ball, of which 60% is direct labor cost. Last year, the company sold 30,000 of these balls, with the following results: Sales (30,000 balls) $ 750,000 Variable expenses 450,000 Contribution margin 300,000 Fixed expenses 210,000 Net operating income $ 90,000 Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3 per ball. If this change takes place and the selling price per ball remains constant at $25, what will be next year's CM ratio and the break-even point in balls? 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? (Round your answer to the nearest whole unit.)
Explanation / Answer
Answer:
The new CM will be as under
Selling price
25
100%
Less variable expenses
(15+3)=18
18
72%
Contribution margin
7
28%
The new break-even point will be:
Sales = Variable expenses + Fixed expenses + Profits
$25Q = $18Q + $210,000 + $0
$7Q = $210,000
Q = $210,000 ÷ $7 per ball
30,000 balls
The new break-even point is =30,000 balls
______________________________________________________________
2
Calculation of the required sales to earn 90,000 profit
Sales = Variable expenses + Fixed expenses + Profits
$25Q = $18Q + $210,000 + $90,000
$7Q = $300,000
Q = $300,000 ÷ $7 per ball
Q = 42,857 balls (rounded)
the required sales to earn 90,000 profit =42,857 balls
Selling price
25
100%
Less variable expenses
(15+3)=18
18
72%
Contribution margin
7
28%
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