Question

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 36,000 of these balls, with the following results: Sales (36,000 balls) $ 900,000 Variable expenses 540,000 Contribution margin 360,000 Fixed expenses 263,000 Net operating income $ 97,000 Required: 1. Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year’s sales level. 2. Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3.00 per ball. If this change takes place and the selling price per ball remains constant at $25.00, what will be next year's CM ratio and the break-even point in balls

Answer 1

Results are below.

Step-by-step explanation:

Giving the following information:

The company has a ball that sells for $25.

Unitary variable cost= $15.00

Fixed expenses 263,000

To calculate the contribution margin ratio, we need to use the following formula:

Contribution margin ratio= contribution margin / selling price

Contribution margin ratio= (25 - 15) / 25

Contribution margin ratio= 0.4

Now, the break-even point in units:

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 263,000 / 10

Break-even point in units= 26,300 units

Degree of operating leverage= contribution margin / operating income

Degree of operating leverage= 360,000 / 97,000

Degree of operating leverage= 3.71

If the unitary variable cost increases by $3:

Contribution margin ratio= (25 - 18) / 25

Contribution margin ratio= 0.28

Break-even point in units= 263,000 / 8

Break-even point in units= 32,875