1 (25 marks) LABMASK Inc. manufactures washable masks which sell for $45 each. At present, the mask is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totalling $27 per mask, of which 60% is direct labor cost. Last year, the company sold 30,000 of these masks, with the following results: Sales (30,000 masks) Variable expenses Contribution margin Fixed expenses Net operating income Required: $1,350,000 810,000 540,000 450,000 $ 90,000 (Round your computation to one decimal place, where applicable) (a) What is the product's contribution margin (CM) ratio? Use the CM ratio to determine the breakeven point in dollar sales. (2 marks) (b) What is the contribution margin per unit? Use the CM per unit to determine the breakeven point in masks. (2 marks) (c) Compute the margin of safety and the degree of operating leverage at last year's sales level. (2 marks) (d) Use the degree of operating leverage you calculated in (c) to determine the estimated net operating income that would result from a 5% increase in unit sales? (I mark) (e) Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $9 per mask. If this change takes place and the selling price per mask remains constant at $45, what will be next year's CM ratio and the break-even point in masks? (2 marks) (f) Refer to the data in (e) above. If the expected change in variable expenses takes place, how many masks will have to be sold next year to earn the same net operating income, $90,000, as last year? (I mark) (g) Refer again to the data in (e) above. The CEO feels that the company must raise the selling price of its washable masks. What selling price per mask must the company charge next year to cover the increased labor costs if he wants to maintain the same CM ratio as last year as computed in (a) above. (I mark) (h) Refer to the original data last year. The company is discussing the construction of a new automated manufacturing plant. The new plant would slash variable expenses per mask by 40% but it would cause fixed expenses per year to double. (i) What would be the company's new CM ratio and new break-even point in masks if the new plant is built? (2 marks) (ii) How many masks will have to be sold next year to cam the same net operating income, $90,000, as last year if the new plant is built? (1 mark) (iii) Assume the new plant is built and that next year the company manufactures and sells 30,000 masks (the same number as sold last year). Prepare a projected contribution format income statement for next year. Show data on a total, per unit and percentage basis. (5 marks) (iv) If you were a member of top management, would you have been in favour of constructing the new plant? Explain. (6 marks)