Reference no: EM131561671

Problem -

Northwood Company manufactures basketballs. The company has a ball that sells for $37. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $25.90 per ball, of which 70% is direct labor cost.

Last year, the company sold 43,000 of these balls, with the following results:

Sales (43,000 balls) - $1,591,000

Variable expenses - 1,113,700

Contribution margin - 477,300

Fixed expenses - 277,500

Net operating income - $ 199,800

Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 20%, but it would cause fixed expenses per year to increase by 92%. If the new plant is built, what would be the company's new GM ratio and new break-even point in balls?

Refer to the data in above.

a. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $199,800, as last year?

b-1. Assume the new plant is built and that next year the company manufactures and sells 43,000 balls (the same number as sold last year). Prepare a contribution format income statement

b-2. Compute the degree of operating leverage.