Problem 6-20 CVP Applications: Break-Even Analysis; Cost Structure; Target Sales (LO6-1, L06-3, L06- 4, L06-5, LO6-6. LO6-8) 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 ball of which 60% is direct labor cost Last year, the company sold 56,000 of these balls, with the following results: Sales (56,000 balls) Variable expenses Contribution margin Fixed expenses Het operating income $ 1,400,000 140,000 560,000 373,000 $ 187,000 Required: 1 Compute (a) last year'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 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 balls? 3 Required: 1. Compute(o) last year'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 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 bolls? 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 earn the same net operating income, $187.000, os last year? Refer ogain to the data in (2) above. The president feels that the company must rote the selling price of its basketballs Northwood Company wants to maintain the same CM ratio as last year (as computed in requirement 10) whot selling price per ball 5. 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 balls? 6. Refer to the data in (5) above a. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $187000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 56,000 balls (the same number as sold last year) Prepare o contribution format income statement and compute the degree of operating leverage Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg 3 Reg 4 Reg 5 Reg 6A Req 6B Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year's sales level. (Round "Unit sales to break even" to the nearest whole unit and other answers to 2 decimal places.) CM Ratio Unit sales to break even Degree of operating leverage 28.00 30,000 balls 7.00 Reg 1 Reg Rog 3 Reg 4 Reg 5 Reg 6A Roq 6B Reg2 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 balls? (Round "CM Ratio" to 2 decimal places and "unt sales to break even to the nearest whole unit) 28.00 % CM Ratio Unit sales to break even 30,000 balls Refer to the data in Required (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, $187,000, as last year? (Round your answer to the nearest whole unit.) Number of balls 42,857 Reg 1 Reg 2 Reg 3 Reg 4 Req5 Reg 6A Reg 6B Refer to the original data. The company is discussing the construcco vi a new, automated manufacturing plant. The new Reg 5 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 balls? (Round "CM Ratio to 2 decimal places and "Unit sales to break even" to the nearest whole unit) Show less 64.00 CM Ratio Unit sales to break even 26,250 balls Reg 1 Reg 2 Reg 3 Reg 4 Reg 5 Reg 6A Reg 6B If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $187,000, as last year? (Round your answer to the nearest whole unit.) Number of balls 31,875 Reg 1 Reg 2 Reg 3 Reg 4 Reg 5 Reg 6A Reg 6B Assume the new plant is built and that next year the company manufactures and sells 56,000 balls (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 decimal places.) Northwood Company Contribution Income Statement Sales $ 750,000 Variable expenses 270,000 Contribution margin 480,000 Fixed expenses 420,000 $ Net operating income $ 60,000 Degree of operating leverage 8.00
