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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...

1.

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:

Required:

1.

Compute (a) the CM ratio and the break

-

even point in balls

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?

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 last year?

4.

Refer again to the data in (2) above. The president feels that the company must raise the

selling

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?

5.

Refer to the original data. The company is discussing the constructio

n 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 ba

lls?

2.

Feather Friends, Inc., distributes a high

-

quality wooden birdhouse that sells for \$20 per unit.

Variable expenses are \$8 per unit, and fixed expenses total \$180,000 per year.

1.

What is the product's CM ratio?

2.

Use the CM ratio to determine the break

-

even point in dollar sales.

3.

Due to an increase in demand, the company estimates that sales will increase by

\$75,000 during the next year. By how much should net operating income increase (or

net loss decrease) assum

ing that fixed expenses do not change?

4.

Refer to the original data. Assume that the company sold 18,000 units last year. The

sales manager is convinced that a 10% reduction in the selling price, combined with a

\$30,000 increase in advertising, would increase

annual unit sales by one

-

third. Prepare

two contribution format income statements, one showing the results of last year's

operations and one showing the results of operations if these changes are made. Would

you recommend that the company do as the sales

manager suggests?

5.

Refer to the original data. Assume again that the company sold 18,000 units last year.

The president does not want to change the selling price. Instead, he wants to increase

the sales commission by \$1 per unit. He thinks that this move, c

ombined with some

increase in advertising, would increase annual sales by 25%. By how much could

advertising be increased with profits remaining unchanged?

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