Northwood Company manufactures a basketball selling for $25 per unit in a small plant heavily relying on direct labor workers. Thus, variable expenses are high, totaling $15.00 per ball, of which 60% is direct labor cost. Last year, the company sold 32,000 balls, with the following results: Sales (32,000 balls) $ 800,000 Variable expenses 480,000 Contribution margin 320,000 Fixed expenses 221,200 Net operating income $ 98,800 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. CM Ratio = 40%; Unit sales to break even = 22,120 balls; Degree of operating leverage= 3.24 Due to an increase in labor rates, the company estimates 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? CM Ratio = 28%; Unit sales to break even = 31,600 balls Refer to the data in requirement 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, $98,800, as last year? Number of balls = 45,715 Refer again to the data in requirement 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?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter16: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 20E

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Sales (32,000 balls)	$ 800,000
Variable expenses	480,000
Contribution margin	320,000
Fixed expenses	221,200
Net operating income	$ 98,800

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. CM Ratio = 40%; Unit sales to break even = 22,120 balls; Degree of operating leverage= 3.24
Due to an increase in labor rates, the company estimates 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? CM Ratio = 28%; Unit sales to break even = 31,600 balls
Refer to the data in requirement 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, $98,800, as last year? Number of balls = 45,715
Refer again to the data in requirement 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?

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Follow-up Question

Refer to the data in requirement 5. Assume the new plant is built and that next year the company manufactures and sells 32,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage.

Note: Round "Degree of operating leverage" to 2 decimal places.

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Northwood Company
Contribution Income Statement


	0

	$0
Degree of operating leverage

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Follow-up Question

Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would variable expenses per ball by 40.00%, 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?

Note: Round "CM Ratio" to 2 decimal places and round "Unit sales to break even" up to the nearest whole unit.

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Follow-up Question

Refer again to the data in requirement 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?

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