Reference no: EM132963734

Question - 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 56,000 of these balls, with the following results:

Sales (56,000 balls) $1,400,000

Variable expenses 840,000

Contribution margin 560,000

Fixed expenses 373,000

Net operating income $187,000

1A) 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 40.00%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company's new break-even point in balls?

1B) If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $187,000, as last year?

1C) Assume the new plant is built and that next year the company manufactures and sells 56,000 balls (the same number as sold last year). What is the contribution format income statement and compute the degree of operating leverage.