Question 3 (25 marks) Woodnorth Company manufactures basketballs. The company has a ball that sells for $25. Currently the ball is manufactured in a small facility that relies heavily on direct-labour. As a result, variable costs are high, totaling $15 per ball and 60% of this cost is for direct labour. Last year the company sold 30,000 basketballs, with the following results: Sales $750,000 Variable expenses 450,000 Contribution margin 300,000 Fixed expenses 210,000 Operating Income/NIBIT $90,000 Required: 1) From the above, compute? a). contribution margin %, b). breakeven revenues $, c). breakeven revenue units, d). degree of operating leverage, e). margin of safety. Operating Leverage = C.M. $ / Operating Income Margin of Safety = Budget or Actual Revenues - Breakeven Revenues 2). Due to an increase in labour rates, the company estimates that variable expenses will increase by $3 per ball next year. If this change takes place and the selling price per ball remains the same at $25, what will be the new contribution margin ratio and break-even point in sales units? 3). Refer to the data (2) above. If the expected change in variable expenses is made, how many basketballs will have to be sold next year to earn the same operating income, $90,000, as last year? 4). Refer to the original data. The company is discussing the construction of a new, automated manufacturing facility. The new facility would reduce variable expenses by 40% or $6.00/unit but would increase fixed expenses to $400,000 per year. If the new plant is built, what would be the company's new contribution margin ratio and new break-even point in sales units? Page 3