ACCTG 211 Lecture Notes - Lecture 21: Income Statement
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Northwood Company manufactures basketballs. The company has aball that sells for $36. At present, the ball is manufactured in asmall plant that relies heavily on direct labor workers. Thus,variable expenses are high, totaling $25.20 per ball, of which 70%is direct labor cost. |
Lastyear, the company sold 52,000 of these balls, with the followingresults: |
Sales (52,000balls) | $ | 1,872,000 |
Variableexpenses | 1,310,400 | |
Contributionmargin | 561,600 | |
Fixed expenses | 453,600 | |
Net operatingincome | $ | 108,000 |
Required: |
1-a. | Compute the CM ratio and the break-even point in balls.(Do not round intermediate calculations. Round up yourfinal break even answers to the nearest whole number.) |
CM Ratio ____% Unitsales to brealdown ______ balls |
1-b. | Compute the the degree of operating leverage at last yearâssales level. (Round your answer to 2 decimalplaces.) |
Degree of Operating Leverage _____ |
2. | Due to an increase in labor rates, the company estimates thatvariable expenses will increase by $1.80 per ball next year. Ifthis change takes place and the selling price per ball remainsconstant at $36.00, what will be the new CM ratio and break-evenpoint in balls? (Do not round intermediate calculations.Round up your final break even answers to the nearest wholenumber.) |
CM Ratio_____% Unit Sales to break even _____ 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, $108,000, as lastyear?(Do not round intermediate calculations.Round your answer to the nearest wholeunit.) |
Number ofballs____ |
4. | Refer again to the data in (2) above. The president feels thatthe company must raise the selling price of its basketballs. IfNorthwood Company wants to maintain the same CM ratio as last year,what selling price per ball must it charge next year to cover theincreased labor costs? (Do not round intermediatecalculations. Round your answer to 2 decimal places.) |
Selling Price______
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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 20%, but it would causefixed expenses per year to increase by 70%. If the new plant isbuilt, what would be the companyâs new CM ratio and new break-evenpoint in balls? (Do not round intermediate calculations.Round up your final break even answers to the nearest wholenumber.)
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6. | Refer to the data in (5) above. |
a. | If the new plant is built, how many balls will have to be soldnext year to earn the same net operating income, $108,000, as lastyear? (Do not round intermediatecalculations.) Number of balls_____ |
b-1. | Assume the new plant is built and that next year the companymanufactures and sells 52,000 balls (the same number as sold lastyear). Prepare a contribution format income statement. (Donot round your intermediate calculations.) |
Northwood Company Contribution Income Statement |
b-2. | Compute the degree of operating leverage. (Do not roundintermediate calculations and round your final answer to 2 decimalplaces.) |
Degree of OperatingLeverage _____ |