Question

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 36,000 of these balls, with the following results: Sales (36,000 balls) $900,000 Variable expenses 540,000 Contribution margin 360,000 Fixed expenses 263,000 Net operating income $ 97,000 Required: 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 1

	Per Unit data	Curret year	Per Unit data	Next Year
		total		total
sales	25	900000	25	900000
variable cost	15	540000	18	648000
contribution	10	360000	7	252000
less fixed cost		263000		263000
net income		97000		-11000
contribution margin ratio = contribution/sales	360000/900000	0.4	252000/900000	0.28
Break even point in balls = fixed cost/contribution margin per unit	263000/10	26300	263000/7	37571