Speedy Sports manufactures basketballs that sell for $ 25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Therefore, variable costs are high, totaling $ 15 per ball, of which 60% is direct labor cost. Fixed costs are $ 210,000. Last year, the firm sold 30,000 balls.

1. Compute (1) the CM ratio and the breakeven point in units and (2) the degree of operating leverage.
2. Due to an increase in labor rates, the firm estimates that variable expenses will increase by $ 3 per ball next year. If this change takes place and the selling price remains the same, what will be the new CM ratio and breakeven point in balls?
3. Refer to the data in (b) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same before tax operating income as last year?
4. Refer to the data in (b) above. The CEO feels that the company must raise the selling price of its basketballs. If the firm wants to maintain the same CM ratio as last year, what unit selling price must it charge next year to cover the increased labor costs?
5. Refer to the original data. The firm is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40%, but it would cause fixed costs per year to double. If the new plant is built, what would be the firms new CM ratio and new breakeven point in balls?
6. 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 before tax operating income as last year?
   2. Presume the new plant is built and that next year the firm manufactures and sells 30,000 balls (the same number as last year). Prepare a contribution margin income statement and compute the degree of operating leverage.
   3. If you were a member of top management, would you have been in favor of constructing the new plant? Explain.