Reference no: EM132966061

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 30,000 of these balls, with the following results:

Sales (30,000 balls) $750,000

Variable expenses 450,000

Contribution margin 300,000

Fixed expenses 210,000

Net operating income $90,000

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, $90,000, as last year?

1C) Assume the new plant is built and that next year the company manufactures and sells 30,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage.