Reference no: EM132816840

Northwood is a company engaged solely in the manufacture of basketballs, which are bought mainly for sporting activities. Northwood uses CVP analysis to establish the minimum level of production to ensure profitability. The company has a ball that sells for £25. At present, the ball is manufactured in a small plant that relies heavily on direct labour workers. Therefore, variable expenses are high, totalling £15 per ball, of which 60% is direct labour 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

Required:

Problem a. Compute last year's CM (C/S) ratio and the break-even point in balls.

Problem b. Due to an increase in labour rates, the company estimates that next year's variable expenses will increase by £3 per ball. If this change takes place and the selling price per ball remains constant at £25, what will be next year's CM ratio and the break-even point in balls?

Problem c. Refer to the data in b. 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?

Problem d. Refer again to the data in b. 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 (as computed in requirement 1a), what selling price per ball must it charge next year to cover the increased labour costs?

Problem e. 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%, 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 balls?