Northwood Company manufactures basketballs.T h ecompany has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavilyo ndirect-labourworkers. Thus, variable ex- pensesare high, totalling $15 per ball, of which 60% is direct labour cost.

240,000 260.000

223,600 $ 36.400

4 8% 52%

Required:

Chapter 4 Cost-Volume-Profit Relationships 127 Last year the company sold 30,000 of these balls, with the following results:

C.

Required:

Sales.

Variable expenses.

Contribution margin Fixed expenses Operating income

$750.000 450.000

300.000

210,000 $ 90.000

1. Compute (a) the CM ratio and the break-even point ni balls, and (b) the degree of operating lever- age at last year's sales level.

.2 Due to an increase in labour rates, thecompany estimates that variable expenses will increase by $3 per ball next year. If this change takes place and the selling price per ball remainsconstant at $25, what will be the new CM ratio and break-even point ni balls?

.3 Refer to the data ni (2) above. If the expected change ni variable expenses takes place,how many balls wil have to be sold next year ot earn the same operating income, $90,000, as last year?

4. Refer again to the data ni (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, what selling price per ball must i tcharge next year to cover the increased labour costs?

5. Refer to the original data.The company isdiscussing the construction of anew, automated manu-

facturing plant. The new plant would slash variable expenses per ball by 40%, but ti would cause fixed expenses per year to double. If the new plant is built, what would be the company's new CM ratio and new break-even point in balls?

6. Refer to t h edata in (5) above.

If the new plant si built, how many balls will have to be sold next year t oearn the same net operating income, $90,000, as last year?

b. Assume the new plant is built and that next year the company manufactures and sells 30,000

balls (the samenumber as sold last year). Prepare a contribution format income statement and

compute the degreeo foperating leverage.

fI you were a member of top management, would you have been ni favour fo constructing the new plant? Explain.