Northwood Company manufactures basketballs. The company has a ball that sells for $35. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $24.50 per ball, of which 70% is direct labor cost.

Last year, the company sold 48,000 of these balls, with the following results:

Sales (48,000 balls)	$	1,680,000
Variable expenses		1,176,000
Contribution margin		504,000
Fixed expenses		420,000
Net operating income	$	84,000

1.

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 20%, but it would cause fixed expenses per year to increase by 70%. If the new plant is built, what would be the companys new CM ratio and new break-even point in balls?

2.

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, $84,000, as last year?

b-2.	Compute the degree of operating leverage.