QUESTION THREE C General Company manufactures basketballs. The company has a ball that sells for Ks 25. At present, the ball is manufactured in a small plant that relies heavily on direct abour workers. Thus, variable costs are high, totalling Kshs.15 per ball, of which 60% is direct labour cost Last year, the company sold 30,000 of these balls, with the following results: Sales (30 non balls) Kshs 750,000 Variable expenses 450.000 Contribution margin 300,000 Fixed expenses 210.000 Net operating income 90,000 Required: Compute a) the CM ratio and the break-even in balls, and b) the degree of operating leverage at last year's sales level. (6 marks) 2 3 Due to an increase in labour rates, the company estimates that variable costs will increase by Kshs.3 per ball next year. If this change takes place and the selling price per ball remains constant at Kshs.25, what will be the new CM ratio and break-even point in balls? (4 marks) Refer the data in(1) 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 (7 marks) (Kshs.90,000) as last year. Refer to the original data. Then 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 cost per year to double. If the new plant is built, what Total: 25 marks] would be the company's new CM ratio and new break-even point in balls? (8 marks) QUESTION THREE C General Company manufactures basketballs. The company has a ball that sells for Ks 25. At present, the ball is manufactured in a small plant that relies heavily on direct abour workers. Thus, variable costs are high, totalling Kshs.15 per ball, of which 60% is direct labour cost Last year, the company sold 30,000 of these balls, with the following results: Sales (30 non balls) Kshs 750,000 Variable expenses 450.000 Contribution margin 300,000 Fixed expenses 210.000 Net operating income 90,000 Required: Compute a) the CM ratio and the break-even in balls, and b) the degree of operating leverage at last year's sales level. (6 marks) 2 3 Due to an increase in labour rates, the company estimates that variable costs will increase by Kshs.3 per ball next year. If this change takes place and the selling price per ball remains constant at Kshs.25, what will be the new CM ratio and break-even point in balls? (4 marks) Refer the data in(1) 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 (7 marks) (Kshs.90,000) as last year. Refer to the original data. Then 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 cost per year to double. If the new plant is built, what Total: 25 marks] would be the company's new CM ratio and new break-even point in balls? (8 marks)