Question - Northwood Company manufactures basketballs. The company makes 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 unit. In the year 2007, the company sold 30,000 of these balls, with the following results: Sales (30,000 units) $750,000 Variable costs 450,000 Contribution margin 300,000 Fixed costs 210,000 Income before taxes 90,000.
Required:
a) Compute the break-even point in units and dollars.
b) Due to an increase in labour rates, the company estimates that variable costs will increase by $3 per ball in 2008. If this change takes place and the selling price and all other costs do not change, what will be the new contribution margin ratio and the new break-even point in units and dollars?
c) Refer to the data in required b). If the expected change in variable costs occurs, how many balls will have to be sold to earn the same operating income as in 2007?
d) Refer again to the data in required b). If the expected increase in variable costs occurs, by how much would the price have to increase in order to maintain the same contribution margin ratio as in 2007?
e) Refer to the original data (ie ignore the data in required b)). The company is discussing the construction of a new, automated manufacturing plant. The new plant would reduce variable costs per ball by 40% compared to 2007, but it would cause total fixed costs to double from 2007. If the new plant is built, what would be the break-even point in units and dollars, assuming the price of the ball remains at $25?
F. Refer to the data in (5) above.
a. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $90,000, as last year?
b. 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 format income statement and compute the degree of operating leverage.
c. If you were a member of top management, would you have been in favor of constructing the new plant? Explain.