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 50,000 of these balls, with the following results:

Sales (50,000 balls) = $ 1,250,000

Variable expenses= 750,000

Contribution margin= 500,000

Fixed expenses= 320,000

Net operating income= $ 180,000

Required:

1. Refer again to the data in (2) above. 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 (as computed in requirement

2. 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 fixed expenses per year to double. If the new plant is built, what would be the companys new CM ratio and new break-even point in balls?

3. 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, $180,000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 50,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage.