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FIFA Company manufactures footballs which sell for $25 each. At present. the ball is manufactured in a small plant that relies heavily on direct labor
FIFA Company manufactures footballs which sell for $25 each. At present. the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totalling $15 per ball, of which 60% is direct labor cost. Last year, the company sold 30,000 of these balls, with the following results: Sales (30,000 balls) Variable expenses Contribution margin Fixed expenses Net operating income $750,000 450,000 300,000 210,000 $90,000 (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 ball by 40% but it would cause fixed expenses per year to double. (1) What would be the company's new CM ratio and new break-even point in balls if the new plant is built? (4 marks) (ii) How many balls will have to be sold next year to earn the same net operating income, $90,000, as last year if the new plant is built? (2 marks) (iii) Assume the new plant is built and that next year the company manufactures and sells 30,000 balls (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 and compute the degree of operating leverage. (12 marks) (iv) If you were a member of top management, would you have been in favor of constructing the new plant? Explain. (10 marks)
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