Northwood company manfactures basketballs. The compan has a ball that sells for $30. At present the ball is manufactured in a small plant that relies on direct labor workers. Thus, variable expenses are high, totaling $18.00 per ball of which 60% is direct labor cost.

Last year the company sold 51,000 of these balls with the following results:

Sales (51,000 balls) -1,530,000

Variable Expense - 918,000

Contribution Margin - 612,000

Fixed Expense - 492,000

Net Operating Income - 120,000

REQUIRED

1. Compute the CM ratio and the break even point in balls. (Do not round intermediate calculations)

2. Compute the degree of operating leverage at last years sales level. (Round 2 decimal places)

3. Due to an increase in labor rates the company estimates that variable expenses will increase by 2.40 per ball next year. If this change takes place and the selling price stays at 30.00 what will the new CM and break even point in balls. (Do not round intermediate calculations)

4. Refer to the data in 2 above. The president feels that the company must raise the selling price of the balls. If Northwood wants to maintain the same CM ratio as last year what selling price per ball must it charge next year to cover the increased labor cost?

5. Refer to the orginal data. 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 increase by 80%. If the new plant is built what would be the companys new CM ratio and new break even point in balls.

6. Refer to the data 5 above: If the new plant is builthow many balls would have to be sold next year to earn the same net operating 120,000 as last year. 6B. Assume the new plant is built and that next year the company manufactures and sells 51,000 ball. Prepare a contribution format income statement.

7. Compute the degree of operating leverage.