Question

Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the...

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 $15.00 per ball, of which 60% is direct labor cost. Last year, the company sold 32,000 of these balls, with the following results:

Sales (32,000 balls) $800,000

Variable expenses $480,000

Contribution margin $320,000

Fixed Expense $211,000

Net operating income $109,000

2. Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3.00 per ball. IF this change takes place and the selling price per ball remains constant at $25.00, what will be next year's CM ratio and the break-even point in balls?

Answer: CM Ratio: 28% Unit sales to break even 30,143 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, $109,000, as last year?

Answer: 45,714

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 ration as last year (40%), what selling price per ball must it charge next year to cover the increase 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 $40.00% but it would cause fixed expenses per year to double if the new plant is built what would be the companies new CM ratio and new break even point in balls?

Homework Answers

Answer #1

1. New CM Ratio = (Sale Price - New Variable Cost) / Sales Price

New CM Ratio = (25 - 18) / 25

New CM Ratio = 28%

Break Even Sales in Units

Break Even Sales in Units = Fixed Expenses / CM per unit

Break Even Sales in Units = 211000 / 7

Break Even Sales in Units = 30143 Units

3. Units needed to be sold = (Fixed Expenses + Operating Income) / New CM per Unit

Units needed to be sold = (211000 + 109000) / 7

Units needed to be sold = 45714 Units

4. New Selling Price = New Variable Cost / (1 - CM Ratio)

New Selling Price = $18 / (1 - 0.40)

New Selling Price = $30

5. New CM Ratio = (Sale Price - New Variable Cost) / Sales Price

New CM Ratio = (25 - 7.50) / 25

New CM Ratio = 70%

Break Even Sales in Units

Break Even Sales in Units = New Fixed Expenses / CM per unit

Break Even Sales in Units = 422000 / 17.50

Break Even Sales in Units = 24114 Units

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