Reference no: EM132573142

Question - Northwood Company manufactures basketballs. The company has a standard ball that sells for $25. At present, the standard ball is manufactured in a small plant that relies heavily on direct labour workers. Thus, variable costs are high, totalling $15 per ball.

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

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

Variable expenses 450,000

Fixed expenses 210,000

Required -

1. Prepare (a) Marginal income statement, (b) Compute the CM ratio and the break-even point in balls.

2. Due to an increase in labour rates, the company estimates that variable costs will increase by $3 per ball next year. If this change takes place and the selling price per ball remains constant 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 costs takes place, how many balls will have to be sold next year to earn the same net income ($90,000) as last year?

4. Refer again to the data in (2) above. The president feels that the company must raise the selling price on the standard balls. If Norwood 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?

5. Refer to the original data. The company is discussing the construction of a new, automated plant to manufacture the standard balls. The new plant would slash variable costs per ball by 40 percent, but it would cause fixed costs to double in amount per year. If the new plant is built, what would be the company's new CM ratio and new break-even point in balls?