Question

Northwood Company manufactures basketballs. The company has a ball that sells for $30. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $18.00 per ball, of which 60% is direct labor cost. Last year, the company sold 50,000 of these balls, with the following results:
Sales(50,000 balls) $1,500,000
Variable expenses 900,000
Contribution Margin 600,000
Fixed Expenses 480,000
Net operating income 120,000 Refer again to the data 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 labor costs?

Answer 1

Answer:

$34

Explanation:

The contribution margin ratio for this year = ($30 - $18) / $30 = 40%

if the variable costs increase by $2.40 due to an increase in labor costs, and the selling price remains the same, the contribution margin ratio will be:

contribution margin ratio = [$30 - ($18 + $2.40)] / $30 = 32%

since the company wants to keep the contribution margin ratio at 40%, the new selling price should be:

40% = (N - $20.40) / N

0.4N = N - $20.40

$20.40 = N - 0.4N = 0.6N

N= $20.40 / 0.6 = $34