Basketball is manufactured. The company has a ball that sells for $25. The ball is manufactured in a small plant that relies heavily on direct labour workers. Variable expenses are high, totaling $15 per ball, of which 60% is direct labour cost. Last year the company sold 30,000 balls. Results:

Sales (30,000 balls) $750,000

Variable expenses $450,000

Contribution Margin $300,000

Fixed expenses $210,000

Net Operating Income $90,000

1.Compute last year's CM ratio and the break-even point in balls.

2.Due to an increase in labour rates cost, the company estimates that next year's variable expenses will increase by $3 per ball. If this change takes place and the selling price per ball remains constant at $25, what will be next year's CM ratio and the break-even point in balls?

3.Refer to the data in previous question #2. 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, $90,000, as last year?

4.Refer again to the previous question #2 . 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 what selling price per ball must it charge next year to cover the increased labour costs?

5.Refer to the original data in slide #2. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40%, but it would cause fixed 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? With the new plant, what does the new structure look like in the : Y = a + bx equation.

6. Refer to the data in the above #5 above. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $90,000, as last year?