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ROBLEM S-20 CVP Applications: Break-Even Analysis: Cost Structure; Terget Sales LOS-1, LOS-3. LOS-4, LOS-S LOS-6, LOS-8 Northacod Company manufactures baskethalls. The company has a ball that sells for $25. At present, the ball is manufnctured in a small plant that relies heavily on direct labor workers. Thn, 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. Required: 1 Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of oper ating leverage at last year's sales level. Due to an increase in labor rates, the company estimates that 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? 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, $90,000, as last year? The president feels that the eompany must raise the sell-

ROBLEM S-20 CVP Applications: Break-Even Analysis: Cost Structure; Terget Sales LOS-1, LOS-3. LOS-4, LOS-S LOS-6, LOS-8 Northacod Company manufactures baskethalls. The company has a ball that sells for $25. At present, the ball is manufnctured in a small plant that relies heavily on direct labor workers. Thn, 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. Required: 1 Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of oper ating leverage at last year's sales level. Due to an increase in labor rates, the company estimates that 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? 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, $90,000, as last year? The president feels that the eompany must raise the sell-

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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PROBLEM S-20 CVP Applications: Break Even Analysis; Cost Structure: Target Safes LOS-1, LOS-3. LOS-4, LOS-S, LOS-6, LOS-8 Northwood Company manufactures basketballs. The company has a ball that sells for $25. Al present, the ball is manufactured in a small plant that relies heavily on direct labor workers. T, variable expenses are high, totaling $15 per ball, of which 60% is direct labor cost. Last the company sold 30,000 of these balls, with the following results: year, $750,000 450,000 Sales (30,000 balls) Variable expenses. 300,000 210.000 Contribution margin Fixed expenses $ 90.000 Net operating income. Required: 1. Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of oper ating 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 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? Refer to the data in (2) above. If the expected change in variable expenses takes place, how 3. many balls will have to be sold next year to earn the same net operating income, $90,000, as last year? Refer again to the data in (2) above. The president feels that the company must raise the sell- 4. ing price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year (as computed in requirement la), what selling price per ball must it charge next year to cover the increased labor costs? 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? 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 6. 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:PROBLEM S-20 CVP Applications: Break Even Analysis; Cost Structure: Target Safes LOS-1, LOS-3. LOS-4, LOS-S, LOS-6, LOS-8 Northwood Company manufactures basketballs. The company has a ball that sells for $25. Al present, the ball is manufactured in a small plant that relies heavily on direct labor workers. T, variable expenses are high, totaling $15 per ball, of which 60% is direct labor cost. Last the company sold 30,000 of these balls, with the following results: year, $750,000 450,000 Sales (30,000 balls) Variable expenses. 300,000 210.000 Contribution margin Fixed expenses $ 90.000 Net operating income. Required: 1. Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of oper ating 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 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? Refer to the data in (2) above. If the expected change in variable expenses takes place, how 3. many balls will have to be sold next year to earn the same net operating income, $90,000, as last year? Refer again to the data in (2) above. The president feels that the company must raise the sell- 4. ing price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year (as computed in requirement la), what selling price per ball must it charge next year to cover the increased labor costs? 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? 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 6. 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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