8 Exercise 6-9 (Algo) Compute and Use the Degree of Operating Leverage (LO6-8] 1 Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format Income statement follows: points 8 02:33:31 Sales Variable expenses Contribution margin Fixed expenses Net operating income eBook Percent of Sales 100% 40% 60% Amount $ 149,000 59,600 89,400 23 , $ 66,400 Hint Print References Required: 1. What is the company's degree of operating leverage? 2. Using the degree of operating leverage, estimate the impact on net operating income of a 28% increase in unit sales. 3. Construct a new contribution format income statement for the company assuming a 28% increase in unit sales. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 9 Problem 6-20 (Algo) CVP Applications: Break-Even Analysis: Cost Structure: Target Sales (L06-1, L06-3, LO6-4, LO6-5, L06-6, LO6-8) 1 point 8 02.2001 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 60,000 of these balls with the following results Sales (6,000 balls) $1,500,000 Variable expenses Contribution margin Fixed expenses Net operating income $225.000 efloor Hint 600,000 when Required: 1. Compute (a) last year's CM ratio and the break even point in balls, and (bthe degree of operating leverage at lost year's sales level 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? 3. Refer to the data in (2) above. If the expected change in variable expenses takes place. how many batis will have to be sold next year to earn the same net operating income $225.000, 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. Northwood Company wants to maintain the same CM ratio os last year o computed in requirement to what selling price perball 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 40.00% but it would cause foed expenses per year to double. If the new plant is built what would be the company's new CM ratio and new break even point in balls? 9.10 Next > 9 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. $225.000, as fast year? b. Assume the new plant is built and that next year the company manufactures and wells 60,000 balls the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage 1 points Complete this question by entering your answers in the tabs below. 02:20 24 Box PIE References Reg 1 Rea 2 Rega Reg4 Regs Req6A Reg 68 Assume the new plant built and that next year the company manufactures and sells 60,000 balls (the same number is sold last year). Prepare a contribution format income statement and compute the degree of operating leverage (Round "Degree of operating leverage to 2 declinal places) Northwood Company Contribution Income Statement Beginning merchandise inventory Sales 15.000.000 Contribution mag (15.000.000) xed expenses 750 000 Not operating income (1570000) 457 Degree of operating loverage