< QUESTION 3 Saito 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 labour workers. Thus, variable costs are high, totaling $15 per ball. Last year, the company sold 30,000 of these balls, and the fixed costs were $210,000. Required: 1. Compute (1) the 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 labour rates, the company estimates that variable costs 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 costs take place, how many balls will have to be sold next year to earn the same operating income 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 Saito wants to maintain the same CM ratio as last year, what selling price per ball must it charge next year to cover the increased labour costs? 5. Refer to the original data. The company is discussing the purchasing a new, automated machine. The new machine would slash variable costs per ball by 40%, but it would cause the fixed cost per year to double. If the new machine is purchased, 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 machine is purchased, how many balls will have to be sold next year to earn the same operating income ($90,000) as last year? b. Assume the new machine is purchased and that next year the company manufactures and sells 30,000 balls (the same number as sold last year). Compute the degree of operating leverage. c. Determine the annual unit sales volume at which Saito would be indifferent between the current and the new machines? If demand exceeds this amount, which machine should be used? 3