Problem 5-20 (Algo) CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6, LO5-8] Northwood Company manufactures basketbalis. The compony has o boll 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 ball, of which 60% is direct labor cost Lost year, the company sold 38,000 of these balls, with the following results: Required: 1. Compute (a) lastyear's CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year's sales level. 2. Due to on increase in labor rates, the compony estimates thot next year's variable expenses will increase by $3.00 per bail if this change takes place and the selling price per ball remains constant at $25.00, whot will be rext year's CM ratio and the break-even point in bails? 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 enin the some net operating income, $116,000, os last year? 4 Refer again to the data in (2) above. The president feels thot the compony must raise the selling price of its basketbalis, if Northwood Company wents to maintein the same CM totio as last year fos computed in requirement 1a), what selling price per boll must it charge next year to cover the increosed labor costs? 5. Refer to the original dato. The compary is discussing the construction of a new, outomated manufacturing plant. The new plant would slash variable expenses per ball by 4000%, but it would cause fred expenses per year to double. if the new plant is buits, what would be the company's new CM rotio and new break-even point in balis? 6. Reter to the data in (5) above. o. If the new plent is bulit, how many bails wil hove 10 be sold next year to eorn the some net operoting income, $116,000, as last year? b. Assume the new plant is built and thot nex yeor the company manufactures and sels 38,000 balis the same number as sold last yeorn Prepare a contribution format income statement and compute the degree of operoting leverage Complete this question by entening your answers in the tabs below. Comoute (a) last year's CM ratio and the break even point in balls, and (b) the deoree of operating leverooc at last year's sales level. (Round "unit askes to break even" to the nearest whole winit and cother answers to 2 decimal places.) 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 balts? (Round "CM Ratio" to 2 dedmal places and "Unit sales to break even" to the nearest whole unit.) Complete this question by entering your answers in the tabs below. Reder 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 eam the same net operating income, $116,000, as last year? (Round your answer to the nearest whole unit.) 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 (as computed in requirement 1a), what selling price per ball must it charge next year to cover the increased labor costs? (Round your answer to 2 decimal places.) Reder to the original data. The company is discussing the constrastion 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 bafls? (Round "CM Ratio" to 2 decimal places and "Unit sales to break even" to the nearest whole unit.) If the new plant is bult, how many balls with have to be sold noxt year to eam the same net operating inceme, $116,000, as Iast year? (Round your answer to the nearest whole unit.) Assume the new plant is built and that next year the company manufactures and sells 38,000 bylls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage. (Round "Degree of operating leverage to 2 dedmal places.)
