Scenario
Management has been meeting about different scenarios they have considered to increase sales and improve profitability. They would like to see the results of these scenarios and have sat down with you, the CMA, to have you provide information to help with their decision.
Requirements
1. Compute the CM ratio (round variable expenses to the nearest dollar) and break-even point in balls and the degree of operating leverage at the given sales levels.
2. Due to an increase in labor rates, the company estimates that variable expenses will increase by $2 per ball next year. If this change takes place and the selling price per ball remains constant at $25, what is the new CM ratio and break-even point in balls?
3. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income as last year?
4. The president feels that the company must raise the selling price of the basketballs if the variable expenses increase by $2. If Northwood Company wants to maintain the same CM ratio as the current
year, what selling price per ball must it charge to cover the increased costs? (round to the nearest dollar)
5. The company is discussion the construction of a new, automated manufacturing plan. The new plant would slash variable expenses by 40% per ball, but it would cause fixed expenses per year to double. If the new plant is built, what is the company's new CM ratio and break-even point in balls?
6. Prepare a contribution format income statement and compute the degree of operating leverage with the assumption that the new plant is built in the next year and the company manufactures 50,000 balls.
The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers, thus variable expenses are $14 per ball, of which 56% is direct labor cost.
Last year, the company sold 50,636 balls with the following results (rounded):
Sales (50,636 balls) ........................................................................... $ 1, 265, 900
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Variable Expenses .............................................................................
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708, 904
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Contribution Margin ......................................................................
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557,000
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Fixed Expenses ..............................................................................
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310,000
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Net operating income ...................................................................
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247,000
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Selling & Admin expenses totaling $310,000 are broken down (based on actual performance, 50,000 balls sold):
Sales Commission: $63, 000
Administrative salaries: $90,000.
Rent Expense: $5,000
Advertising Expense: $140,000
Depreciation expense: $12,000