Problem 5-20 Various CVP Questions: Break-Even Point; Cost Structure; Target Sales [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6, LO5-8]

Northwood Company manufactures basketballs. The company has a ball that sells for $35. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $24.50 per ball, of which 70% is direct labor cost.

Last year, the company sold 57,000 of these balls, with the following results:

Sales (57,000 balls)

$

1,995,000

Variable expenses

1,396,500

Contribution margin

598,500

Fixed expenses

493,500

Net operating income

$

105,000

1-a.	Compute last year's CM ratio and the break-even point in balls. (Do not round intermediate calculations.)

1-b.	Compute the the degree of operating leverage at last years sales level. (Round your answer to 2 decimal places.)

2.	Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3.50 per ball. If this change takes place and the selling price per ball remains constant at $35.00, what will be next year's CM ratio and the break-even point in balls? (Do not round intermediate calculations.)

CM Ratio	65	%
Unit sales to break even	70,500	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, $105,000, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole unit.)

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 1a), what selling price per ball must it charge next year to cover the increased labor costs? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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 30%, but it would cause fixed expenses per year to increase by 99%. If the new plant is built, what would be the companys new CM ratio and new break-even point in balls? (Do not round intermediate calculations.)

CM Ratio%

Unit sales to break even

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, $105,000, as last year? (Do not round intermediate calculations. Round up your final answer to the nearest whole number.)

b-1.	Assume the new plant is built and that next year the company manufactures and sells 57,000 balls (the same number as sold last year). Prepare a contribution format income statement (Do not round your intermediate calculations.)
	Northwood CompanyContribution Income Statement

b-2.	Compute the degree of operating leverage. (Do not round intermediate calculations and round your final answer to 2 decimal places.)