PROBLEM S-20 CVP Applicatione: Break Even Analysie Cost Structure: Target Sales

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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point that you computed in requirement 27
PROBLEM S-20 CVP Applications Break Even Analysie Cost Structure; Target Sales LOS-1, LOS-3,
LOS-4, LOS-, LOS-6, LOS-8
Northwood Company manufactures baskethalls. The company has a ball that sells for 525.
Al present, the ball is manufactured in a small plant that relies heavily on direct labor workers.
Th, 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)
Variable expenses.
$750,000
450,000
Contribution margin
Fixed expenses..
300,000
210.000
$ 90.000
Net operating income.
Reguired:
Compute (a n
a pon
ext year
Refer to the original data. The company is discussing the construction of a new, automated
5.
manufacturing plant. The new plant would slash variable expenses per ball by 40%, 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?
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 carn the same
net operating income, $90,000, as last year?
Assume the new plant is built and that next year the company manufactures and sells
a.
b.
30,000 balls (the same number as sold last year). Prepare a contribution format income
statement and compute the degree of operating leverage.
If you were a member of top management, would you have been in favor of constructing
the new plant? Explain.
C.
Transcribed Image Text:point that you computed in requirement 27 PROBLEM S-20 CVP Applications Break Even Analysie Cost Structure; Target Sales LOS-1, LOS-3, LOS-4, LOS-, LOS-6, LOS-8 Northwood Company manufactures baskethalls. The company has a ball that sells for 525. Al present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Th, 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) Variable expenses. $750,000 450,000 Contribution margin Fixed expenses.. 300,000 210.000 $ 90.000 Net operating income. Reguired: Compute (a n a pon ext year Refer to the original data. The company is discussing the construction of a new, automated 5. manufacturing plant. The new plant would slash variable expenses per ball by 40%, 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? 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 carn the same net operating income, $90,000, as last year? Assume the new plant is built and that next year the company manufactures and sells a. b. 30,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage. If you were a member of top management, would you have been in favor of constructing the new plant? Explain. C.
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