Reference no: EM133003926

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 $15.00 per ball, of which 60% is direct labor cost.

Last year, the company sold 52,000 of these balls, with the following results:

Sales (52,000 balls) $ 1,300,000
Variable expenses 780,000
Contribution margin 520,000
Fixed expenses 321,000
Net operating income $ 199,000

Problem 1: Assume the new plant is built and that next year the company manufactures and sells 52,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage.