Answer:
Northwood Company
1. Contribution margin ratio = Contribution per unit/Selling price * 100
= $10/$25 * 100
= 40%
Break-even point in quantity of balls = Fixed cost/Contribution margin
= $210,000/$10
= 21,000 balls
Degree of operating leverage = Contribution margin divided by Net operating income (sales minus variable costs and fixed costs)
= $300,000/$90,000
= 3.33
New CM ratio =
Selling price $25
Variable cost 18 (15 + 3)
Contribution $7
Contribution margin ratio = $7/$25 * 100
= 28%
3. Break-even point in quantity of balls = Fixed expenses/contribution margin = $210,000/$7
= 30,000 balls
4. Break-even point in quantity of balls to achieve a target profit of $90,000
= (Fixed cost + Target profit)/$7
= ($210,000 + $90,000)/$7
= $300,000/$7
= 42,857 balls
5. The selling price per ball must increase to:
Variable cost = $15 + $3 = $18 = 60% of selling price
Therefore, new selling price = $18/60%
= $30
6. Selling price = $25
Variable = 9 ($15 * 60%)
Contribution $16 ($25 - $9)
Fixed expenses = $420,000 (210,000 * 2)
New CM ratio = $16/$25 * 100
= 64%
Break-even point in quantity of balls = Fixed expenses/Contribution margin
= $420,000/$16
= 26,250 balls
7. To earn target net operating income of $90,000, the quantity of balls will be:
= ($420,000 + $90,000)/$16
= $510,000/$16
= 31,875 balls
8. Contribution Format Income Statement:
Sales Revenue $750,000 ($25 * 30,000)
Variable expenses 270,000 ($9 * 30,000)
Contribution margin $480,000
Fixed expenses 420,000
Net operating income $60,000
Degree of operating leverage = Net operating income/Contribution margin
= $60,000/$480,000
= 0.125
Explanation:
a) Data and Calculations:
Selling price per ball = $25
Variable cost per ball = $15 ($450,000/30,000)
Contribution per ball = $10
Fixed expenses = $210,000
Net operating income = $90,000
Sales $750,000
Variable expenses (450,000)
Contribution margin 300,000
Fixed expenses (210,000)
Net operating income$ 90,000
b) Northwood's degree of operating leverage (DOL) measures how much the operating income of the company will change as a result of a change in its sales. The DOL ratio, which is a multiple, enables analysts to determine the impact of any change in sales on the earnings or profits of Northwood Company in a given year.
