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-
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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