MGAB03H3 Study Guide - Operating Leverage, Earnings Before Interest And Taxes, Activity-Based Costing

Please answerall questions (1-5) and show work for better understanding...Thankyou!

Northwood Companymanufactures basketballs. The company has a standard ball thatsells for $25. At present, the standard ball is manufactured in asmall plant that relies heavily on direct labor workers. Thus,variable costs are high, totaling $15 per ball.

Last year, the companysold 30,000 standard balls, with the following results:

Sales (30,000standard balls) $750,000

Less variableexpenses 450,000

Contributionmargin 300,000

Less fixedexpenses 210,000

Netincome $ 90,000

Required 1. Compute (a) the CM ratio and thebreak-even point in balls, and (b) the degree of operating leverageat last year’s level of sales.

2. Due to an increase in labor rates, the company estimates thatvariable costs will increase by $3 per ball next year. If thischange takes place and the selling price per ball remains constantat $25, what will be the new CM ratio and break-even point inballs?

3. Refer to the data in (2) above. If the expected change invariable costs takes place, how many balls will have to be soldnext year to earn the same net income ($90,000) as last year?

4. Refer to the original data. The company is discussing theconstruction of a new, automated plant to manufacture the standardballs. The new plant would slash variable costs per ball by 40%,but it would cause fixed costs to double in amount per year. If thenew plant is built, what would be the company’s new CM ratio andnew break-even point in balls?

5. Refer to the data in (4) above.

a. If the new plant is built, how many balls will haveto be sold next year to earn the same net income ($90,000) as lastyear?

b. Assume the new plant is built and that next year thecompany manufactures and sells 30,000 balls (the same number assold last year). Prepare a contribution income statement andcompute the degree of operating leverage.

c. If youwere a member of top management, would you

have voted in favorof constructing the new plant? Explain.

PROBLEM 5-20 Various CVP Questions: Break-Even Point; Cost Structure; Target Sales [LO5-1, L05-3, LO5-4, L05-5, LO5-6, L05-8] Northwood Company manufactures basketballs. 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 high, totaling $15 per ball, of which 60% is direct labor cost. Last year, the company sold 30,000 of these balls, with the following results: Sales (30,000 balls) ...... Variable expenses ...... Contribution margin .... Fixed expenses .. Net operating income ..... $750,000 450,000 300,000 210,000 $ 90,000 Required: 1. Compute (a) the CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year's sales level. 2. Due to an increase in labor rates, the company estimates that variable expenses will increase by $3 per ball next year. If this change takes place and the selling price per ball remains con- stant at $25, what will be the new CM ratio and break-even point in balls? 3. Refer to the data in (2) above. 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, $90,000, as 5. last year? Refer again to the data in (2) above. The president feels that the company must raise the sell- ing price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year, what selling price per ball must it charge 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 expenses per ball by 40%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company's new CM ratio and new break-even point in balls? 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. 6.

Northwood Company manufactures basketballs. The company has aball that sells for $25. At present, the ball is manufactured in asmall plant that relies heavily on direct labor workers. Thus,variable expenses are high, totaling $15.00 per ball, of which 60%is direct labor cost.

Last year, the company sold 58,000 of these balls, with thefollowing results:

Required:

1. Compute (a) last year's CM ratio and the break-even point inballs, and (b) the degree of operating leverage at last year’ssales level.

2. Due to an increase in labor rates, the company estimates thatnext year's variable expenses will increase by $3.00 per ball. Ifthis change takes place and the selling price per ball remainsconstant at $25.00, what will be next year's CM ratio and thebreak-even point in balls?

3. Refer to the data in (2) above. If the expected change invariable expenses takes place, how many balls will have to be soldnext year to earn the same net operating income, $206,000, as lastyear?

4. Refer again to the data in (2) above. The president feelsthat the company must raise the selling price of its basketballs.If Northwood Company wants to maintain the same CM ratio as lastyear (as computed in requirement 1a), what selling price per ballmust it charge next year to cover the increased labor costs?

5. Refer to the original data. The company is discussing theconstruction of a new, automated manufacturing plant. The new plantwould slash variable expenses per ball by 40.00%, but it wouldcause fixed expenses per year to double. If the new plant is built,what would be the company’s new CM ratio and new break-even pointin balls?

6. Refer to the data in (5) above.

a. If the new plant is built, how many balls will have to besold next year to earn the same net operating income, $206,000, aslast year?

b. Assume the new plant is built and that next year the companymanufactures and sells 58,000 balls (the same number as sold lastyear). Prepare a contribution format income statement and Computethe degree of operating leverage.