Northwood Company manufactures basketballs. The company has a standard ball that sells for P25. At present, the standard ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling P15 per ball. Last year the company sold 30,000 standard balls, with the following results: Sales (30,000 standard balls) 750,000 Less: Variable expenses 450,000 Contribution Margin 300,000 Less: Fixed costs 210,000 Net Income 90,000 Compute for the CM ratio and the breakeven point in balls. Due to an increase in labor rates, the company estimates that variable costs will increase by P3 per ball next year. If this change takes place and the selling price per ball remains constant at P25, what will be the new CM ratio and breakeven point in balls? Refer to the data in (B) above. If the expected change in variable costs takes place, how many balls will have to be sold next year to earn the same net income (P90,000) as last year? Refer to the data in (B) above. The president feels that the company must raise the selling price on the standard balls. 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 cost? Refer to the original data. The company is discussing the construction of a new, automated plant to manufacture the standard ball. The new plant would slash variable costs per ball by 40%, but it would cause fixed costs to double in amount per year. If the new plant is built, what would be the company’s new CM ratio and new breakeven point in balls?

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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Northwood Company manufactures basketballs. The company has a standard ball that sells for P25. At present, the standard ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling P15 per ball. Last year the company sold 30,000 standard balls, with the following results:

Sales (30,000 standard balls)	750,000
Less: Variable expenses	450,000
Contribution Margin	300,000
Less: Fixed costs	210,000
Net Income	90,000

Compute for the CM ratio and the breakeven point in balls.

Due to an increase in labor rates, the company estimates that variable costs will increase by P3 per ball next year. If this change takes place and the selling price per ball remains constant at P25, what will be the new CM ratio and breakeven point in balls?

Refer to the data in (B) above. If the expected change in variable costs takes place, how many balls will have to be sold next year to earn the same net income (P90,000) as last year?

Refer to the data in (B) above. The president feels that the company must raise the selling price on the standard balls. 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 cost?

Refer to the original data. The company is discussing the construction of a new, automated plant to manufacture the standard ball. The new plant would slash variable costs per ball by 40%, but it would cause fixed costs to double in amount per year. If the new plant is built, what would be the company’s new CM ratio and new breakeven point in balls?

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