Northwood Company manufactures basketballs. The company has a
ball that sells for $35. At present, the ball is manufactured in a small plant
that relies heavily on direct labor workers. Thus, variable expenses are high,
totaling $21.00 per ball, of which 60% is direct labor cost.
Last year, the company sold 41,000 of these balls, with the
following results:
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|
|
|
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Sales (41,000 balls)
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$
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1,435,000
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Variable expenses
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861,000
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|
|
|
|
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Contribution margin
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574,000
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Fixed expenses
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420,000
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|
|
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|
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Net operating income
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$
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154,000
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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 $2.80 per ball next year. If this change
takes place and the selling price per ball remains constant at $35.00, 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, $154,000, 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 30%, but it would cause fixed expenses per year
to increase by 76%. 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.
If the new plant is built, how many balls will have to be sold
next year to earn the same net operating income, $154,000, 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 41,000 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.)
TUTORIAL PREVIEW
1. a.
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Selling price
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$35
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100%
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Variable expenses
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21
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60%
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Contribution margin
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$14
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40%
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Solution file name: Northwood Company.doc File type: .doc PRICE: $15
