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 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


Required:


a.Compute the CM ratio and the break-even point in balls.

b.Compute the the degree of operating leverage at last year

Answer 1

Answer: (a) CM ratio = 40, break even point in balls = 21,000 balls (b ) degree of operating leverage = 3

Explanation:

(a) To calculate the CM ratio , we use the formula

Selling price - variable expenses / selling price

Selling price = $25, variable expenses = $15

= (25 - 15 )/ 25

= 10 / 25

= 0.4 × 100

= 40

To calculate the break -even points in balls, we use the formula

Break even point = fixed cost / contribution per unit

Fixed cost = $210,000, Contribution per unit = (25 -15) = 10

210,000 / 10

= 21,000 balls

(b) To calculate the degree of operating leverage last year, we use the formula

Contribution margin / net income

Contribution margin =$300,000, net income = 90,000

= 300,000 / 90,000

= 3.33

= 3