Fannell Products manufactures recreational equipment. One of the company's products, a skateboard, sells for $$37\mathrm{.}50.$ The skateboards are manufactured in an antiquated plant that relies heavily on direct labour workers. Therefore, variable costs are high, totalling $$22\mathrm{.}50$ per skateboard. Fixed costs were $$480,000$ for the past year. Over the past year, the company sold $40,000$ skateboards.

Management is anxious to maintain, and perhaps even improve, its present level of income from the skateboards.

REQUIRED:

a$.$ Compute the contribution margin ratio, the break$-$even point in skateboards $($quantity$)$ and the operating income for the past year.

b$.$ Compute the margin of safety at last year's level of sales. Explain to the manager what these measures mean.

c$.$ Compute the operating leverage.

ATTEMPT THE QUIZ ON BLACKBOARD $($under Assignment$)$

d$.$ Due to an increase in labour rates, the company estimates that variable costs will increase by $$3$ per skateboard next year. If this change takes place and the selling price per skateboard remains constant at $$37\mathrm{.}50,$ what will be the new contribution margin ratio and the new break$-$even point in skateboards?

e$.$ Refer to your calculation in $($c$).$ If the expected change in variable costs takes place, how many skateboards will have to be sold next year to earn the same operating income as last year?

f$.$ Refer to the original data. The company is considering the construction of a new, automated plant. The new plant would slash variable costs by $40\%,$ but it would cause fixed costs to increase by $90\%.$ If the new plant is built, what would be the company's new contribution margin ratio and the new break$-$even point in skateboards?

g$.$ If you were a member of top management, would you have been in favour of constructing the new plant? Explain your answer.