Exercise 4-20 - Exercise 4-20 By Marvin V Mendoza Northwood...

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Exercise 4-20 By: Marvin V. Mendoza By: Marvin V. Mendoza
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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 : Unit Price Quantity Amount Sales (30,000 balls) $25.00 30,000 $750,000.00 Variable Expenses $15.00 30,000 $450,000.00 Contribution Margin $10.00 30,000 $300,000.00 Fixed Expenses $210,000.00 Net Operating Income $90,000.00
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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 CM Ratio CM/Sales 40.00% ($300,000/ $750,000) *100 Break-even (balls) Fixed Expense 21,000 balls ($210,000/ $10) CM Degre of Operating Leverage CM 3.33 ($300,000/ $90,000) NOI
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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 constant at $25, what will be the new CM ratio and break-even point in balls?
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