Problem 1: Incremental analysis (14 pts)

The following monthly data are available for the Challenger Company and its only product, Product SW:

Total Per Unit

Sales (400 Units) $110,000 $275

Variable expences 44,000 110

contribution margin 66,000 $165

Fixed expenses 52,800

Net operating income $13,200 Required: a. Without resorting to calculations, what is the total contribution margin at the break-even point? (1 pts)

b. Management is contemplating the use of plastic gearing rather than metal gearing in Product SW. This change would reduce variable costs by $15. The company's marketing manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 350 units per month. Using the incremental analysis method, evaluate whether this change should be made? (3 pts)

c. Assume that Challenger Company is currently selling 400 units of Product SW per month. Management wants to increase sales and feels this can be done by cutting the selling price by $25 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50%. Using the incremental analysis method, evaluate whether this change should be made? (5 pts)

d. Assume that Challenger Company is currently selling 400 units of Product SW. Management wants to automate a portion of the production process for Product SW. The new equipment would reduce direct labor costs (which is assumed variable) by $20 per unit but would result in a fixed monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product SW thus resulting in an increase in monthly sales of 12%. Using the incremental analysis method, evaluate whether this change should be made? (5 pts)

Problem 2: Various CVP Questions: Break-Even Point; cost Structure; Target Sales. (16 pts)

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 per ball, of which 60 percent is direct labor cost.

Last year, the company sold 30,000 of these balls, with the following results:

Sales..	$750,000
Variable expenses.	(450,000)
Contribution margin.	300,000
Fixed expenses.	(210,000)
Net operating income	$ 90,000

Required:

Compute the CM ratio and the break-even point in quantity of balls. (2 pts)

Compute the degree of operating leverage at last years sales level. (1 pts)

Due to an increase in labor rates, the company estimates that variable expenses will increase by $3 per ball next year. If this change takes place and the selling price per ball remains constant at $25, what will be the new CM ratio and break-even point in quantity of balls? (2 pts)

Refer to the data in (3) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income, $90,000, as last year? (1 pts)

Refer again to the data in (3) above. The president feels that the company must raise the selling price of its basketballs. If Northwood Company wants to maintain the same contribution margin ratio as last year, what selling price per ball must it charge next year to cover the increased labor costs? (2 pts)

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%, 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 quantity of balls? (3 pts)

Refer to the data in (6) above.

If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $90,000, as last year? (2 pts)

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 contribution format income statement and compute the degree of operating leverage. (3 pts)