PROBLEM 4-21 Basic Cost-Volume-Profit Analysis; Break-Even Point; Cost Structure; Target Sales [I.O1, L.O2, L.04, L.O5, L.O6, LO8] Northwood Company manufactures hasketballs. The company has a ball that sells for $25. At present. the ball is manufactured in a small plant that relics beavily on direct-labour workers. Thas, variable expenses are high, totalling $15 per ball, of which 60 e is direct labour cost. Managerial Accounting, 12th Cana Chapter 4 Cost-Volume-Profit Relationships Last year the company sold 30,000 of these balls with the following results: Required: 1. Compute (a) the CM ratio and the break-even point in balls, and (b) the degrec of operating leverage at last year's sales level. 2. Due to an increase ia labour rates, the company esieutes that variable expenees 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 balls? 3. Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to carn the same operating income, $90,000, as last year? 4. 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. what selling price per tall mus it charge next year to cover the increased labour costs? 5. Refer to the original data. The compeny 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 company's new CM ratio and new break-even point in balls? 6. Refer to the data in (5) above. a. If the new plant is built, bow many balls will bave to be sold next year to earn the same net eperating income, $90,000, as last year? b. Assume the new plant is built and that next year the company mantaftures and sells 30.000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leveruge. c: If you were a menber of top management, woald you have been in favour of constracting the new plant? Explain