Northwood Company manufactures basketballs. The company has a ball that sells for $$25.$ At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $$15\mathrm{.}00$ per ball, of which $60\%$ is direct labor cost. Last year, the company sold $58,000$ of these balls, with the following results: Sales $(58,000$ balls$)$$ $1,450,000$Variable expenses$870,000$Contribution margin$580,000$Fixed expenses$374,000$Net operating income$ $206,000$ Required:$1.$ Compute $($a$)$ last year's CM ratio and the break$-$even point in balls, and $($b$)$ the degree of operating leverage at last years sales level$\mathrm{.}2.$ Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $$3\mathrm{.}00$ per ball. If this change takes place and the selling price per ball remains constant at $$25\mathrm{.}00,$ what will be next year's CM ratio and the break$-$even point in balls?$3.$ Refer to the data in $(2)$ above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income, $$206,000,$ as last year?$4.$ Refer again to the data in $(2)$ above. The president feels that the company must raise the selling price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year $($as computed in requirement $1$a$),$ what selling price per ball must 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 plant would slash variable expenses per ball by $40\mathrm{.}00\%,$ but it would cause fixed expenses per year to double. If the new plant is built, what would be the companys new CM ratio and new break$-$even point in balls?$6.$ Refer to the data in $(5)$ above.a$.$ If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $$206,000,$ as last year?b$.$ Assume the new plant is built and that next year the company manufactures and sells $58,000$ balls $($the same number as sold last year$).$ Prepare a contribution format income statement and compute the degree of operating leverage.  

Answer rating: 100% (QA)

a Last years Contribution Margin Ratio CMR is calculated as follows CMR Contribution Margin Sales 580000 1450000 Last years CMR 040 or 40 To calculate ... View the full answer