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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 40.00%, 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? (Round "CM Ratio" to 2 decimal places and "Unit sales to break even" to the nearest whole unit.)

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Question Completion with original data:

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 $15.00 per ball, of which 60% is direct labor cost Last year, the company sold 38,000 of these balls, with the following results:

Sales (38,000 balls)      $950, 000

Variable expenses          570, 000

Contribution margin       380, 000

Fixed expenses              264, 000

Net operating income  $ 116, 000

Answer:

Northwood Company

New Contribution Margin Ratio:

0.64

New Break-even Point in balls:

33,000 balls

Explanation:

a) Data and Calculations:

Selling price = $25

Variable manufacturing cost = $15 per ball

Direct labor = 60% of $15 = $9

Other variable cost = $6 ($15 - $9)

Reduction of Variable manufacturing cost by 40% = $9 ($15 * 60%)

New fixed expenses = $528,000 ($264, 000 * 2)

Income Statement        Value           Per unit

Sales (38,000 balls)      $950, 000   $25

Variable expenses          342, 000     $9

Contribution margin       608, 000    $16

Fixed expenses              528, 000

Net operating income   $ 80, 000

Contribution margin ratio = $16/$25 = 0.64

Break-even point in unit sales = Fixed expenses/Contribution per margin

= $528,000/$16 = 33,000 balls

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