Answered Essay: Problem 5-20 CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO5-1, LO5- 3, LO5-4, Lo5-5, LO5-6,

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Problem 5-20 CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO5-1, LO5- 3, LO5-4, Lo5-5, LO5-6, LO5-8 Northwood Company manufactures basketballs. The company has a ball that sells for $49. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $34.30 per ball, of which 70% is direct labor cost. Last year, the company sold 58,000 of these balls, with the following results Sales (58,000 bal1s) Variable expenses Contribution margin Fixed expenses Net operating income $ 2,842,000 1,989,400 852,600 705,600 $147,000 Required: 1. Compute (e) last years CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last years sales level. 2. Due to an increase in labor rates, the company estimates that next years variable expenses will increase by $4.90 per ball. If this change takes place and the selling price per ball remains constant at $49.00, what will be next years CM ratio and the break-even point in balls? < Prev 2 of 121 Next > media%2Fe59%2Fe59da222-dd41-4e40-aa61-81
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Problem 5-20 CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO5-1, LO5- 3, LO5-4, Lo5-5, LO5-6, LO5-8 Northwood Company manufactures basketballs. The company has a ball that sells for $49. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $34.30 per ball, of which 70% is direct labor cost. Last year, the company sold 58,000 of these balls, with the following results Sales (58,000 bal1s) Variable expenses Contribution margin Fixed expenses Net operating income $ 2,842,000 1,989,400 852,600 705,600 $147,000 Required: 1. Compute (e) last year’s 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 next year’s variable expenses will increase by $4.90 per ball. If this change takes place and the selling price per ball remains constant at $49.00, what will be next year’s CM ratio and the break-even point in balls?

Expert Answer

 

3)Variable expense at present : 1989400/58000 = $ 34.30 per ball

Variable expense(revised) 34.3+4.9 = $ 39.2

contribution per ball = 49-39.2 =9.8

Target sales (ball)= [fixed cost+target income]/contribution per ball

=[705600+147000]/9.8

= 852600/9.8

= 87000 balls

5)Variable expense revised :old variable cost(1-decline)

= 34.30(1-.30)

= $ 24.01

Contribution = 49-24.01 = 24.99

fixed cost:705600*2= 1411200

CM ratio = contribution /price

= 24.99/49

= .51 or 51%

BEP=fixed cost/contribution per ball

= 1411200/24.99

= 56470.59 or 56471 balls

6A)Balls to sell :[Fixed cost+target income]/contribution per baLL

=[1411200+147000]/24.99

= 1558200/ 24.99

= 62352.9 or 62353 balls approx

6B)

sales 2842000
variable expense [58000*24.01] 1392580
contribution margin 1449420
fixed expense 1411200
net income 38220

net degree of operating leverage = contribution /net income

1449420/38220

= 37.92

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