Problem $5-20($Static$)$ CVP Applications: Break$-$Even Analysis; Cost Structure; Target Sales $[$LO$5-1,$ LO$5-2,$ LO$5-3,$ LO$5-4,$ LO$5-6,$ LO$5-7]$

Northwood Company manufactures a basketball selling for $$25$ per unit in a small plant heavily relying on direct labor workers. Thus, variable expenses are high, totaling $$15$ per ball, of which $60\%$ is direct labor cost.

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

Sales $(30,000$ balls$)$ $ $750,000$

Variable expenses $450,000$

Contribution margin $300,000$

Fixed expenses $210,000$

Net operating income $ $90,000$

Required:

Compute:

last year's CM ratio and the break$-$even point in balls and

the degree of operating leverage at last year$$s sales level.

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

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, $$90,000,$ as last year?

Refer again to the data in requirement $2.$ 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 $($as computed in requirement $1$a$),$ what selling price per ball must it charge next year to cover the increased labor costs?

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 company$$s new CM ratio and new break$-$even point in balls?

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, $$90,000,$ as last year?

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