Problem 2-20 (Algo) CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO2-1, LO2-3, LO2-4, LO2-5, LO2-6, LO2-8] 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 boll, of which 60% is direct labor cost. Last year, the company sold 34,250 of these balls, with the following results: Required: 1. Compute (o) last year's CM ratio and the break-even point in balis, and (b) the degree of operating leverage at last year's soles level. 2. Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3.00 per ball, if this change tokes place and the selling price per ball remains constant at $25.00, what will be next year's CM ratio and the break-even point in balls? 3. Refer to the data in requirement 2. 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, $108,700, as last year? 4. Refer again to the data in requirement 2 . The president feeis that the company must ralse the seling price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year (as computed in requirement la), what seling price per ball muv it charge next year to cover the increased tabor costs? 5. Refer to the original data. The company is discussing the construction of a new, outomated 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 bult. what would be the company's new CM ratio and new break-even point in balls? 6. Refer to the data in requirement 5. a. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $108,700,05 last year? b. Assume the new plant is built and that next year the company manufactures and sells 34,250 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage. Answer is not complete. Complete this question by entering your answers in the tabs below. Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of operat sales level. Note: Round "Unit sales to break even" up to the nearest whole unit and other answers to 2 dec Answer is not complete. Complete this question by entering your answers in the tabs below. Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3.00 per ball. If this change takes place and the selling price per ball remains constant at $25.00, what will be next year's CM ratio and the break-even point in balis? Note: Round "CM Ratio" to 2 decimal places and round "Unit sales to break even" up to the nearest whole unit. Answer is not complete. Complete this question by entering your answers in the tabs below. Refer to the data in requirement 2 . If the expected change in variable expenses takes place, how many balls will have to be sold next year to carn the same net operating income, $108,700, as last year? Note: Round your answer up to the nearest whole unit. ( Answer is not complete. Complete this question by entering your answers in the tabs below. 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 company's new CM ratio and new break-even point in balis? Note: Round "CM Ratio" to 2 decimal places and round "Unit sales to break even" up to the nearest whole unit. Answer is not complete. Complete this question by entering your answers in the tabs below. Refer to the data in requirement 5 . If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $108,700, as last year? Note: Round your answer up to the nearest whole unit. Complete this question by entering your answers in the tabs below. Refer to the data in requirement 5. Assume the new plant is built and that next year the company manufactures and sells 34,250 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree 0 operating leverage. Note: Round "Degree of operating leverage" to 2 decimal places
