Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in asmall plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $15.00 per ball, of which 60% is directlabor costLast year, the company sold 33,500 of these balls, with the following results:Sales (33,500 balls)Variable expensesContribution marginFixed expensesNet operating income$ 837,500502,500335,000229,600$ 105,400Required:1. 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 thischange takes place and the selling price per ball remains constant at $25.00, what will be next year's CM ratio and the break-evenpoint in balls?3. Refer to the data in requirement 2. If the expected change in variable expenses takes place, how many balls will have to be soldnext year to earn the same net operating income. $105,400, as last year?4. Refer again to the data in requirement 2. The president feels that the company must raise the selling price of its basketballs. IfNorthwood Company wants to maintain the same CM ratio as last year (as computed in requirement 10), what selling price per ballmust 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 plantwould slash variable expenses per ball by 40.00 %, but it would cause fixed expenses per year to double. If the new plant is built, whatwould be the company's new CM ratio and new break-even point in balls?6. Refer to the data in requirement 5.a. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $105,400, as lastyear?b. Assume the new plant is built and that next year the company manufactures and sells 33,500 balls (the same number as sold lastyear). Prepare a contribution format income statement and compute the degree of operating leverage.

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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