Question 6

Satesh Northwood Company Bhd manufactures basketballs. The company has a ball that sells for RM25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling RM15 per ball.

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

Sales (30,000 balls)	RM750,000
Variable expenses	RM450,000
Contribution Margin	RM300,000
Fixed expenses	RM210,000
Net Operating Income	RM90,000

Required:

Compute the contribution margin ratio and break-even point in balls.

Due to an increase in labor rates, the company estimates that variable costs will increase by RM3 per ball next year. If this change takes place and the selling price per ball remains constant at RM25, what will be the new contribution margin ratio and break-even points in balls?

Refer to the data in (b) above, if the expected change in variable costs takes place, how many balls will have to be sold next year to earn the same net operating income RM90,000 as last year?

Refer again to the data in (b) above; the president feels that the company must raise the selling price of its basketballs. If Satesh Northwood wants to maintain the same contribution margin ratio as last year, what selling price per ball must it change 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 costs per ball by 40%, but it would cause fixed costs per year to double. If the new plant built, what would be the companys new contribution margin ratio and new break-even point in balls?

Refer to the data in (e) above:

1.If the new plant is built, how many balls will have to be sold next year to earn the same net operating income (RM90,000) as last year?

2.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 income statement.

3.

4.If you were a member of top management, would you have been in favor of construction the new plant? Explain.