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.
Answer the following independent questions:
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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