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2. Northwood Company manufactures basketballs. The company has a standard ball that sells for $100. At present, the standard ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling $60 per ball.

Last year, the company sold 40,000 standard balls, with the following results:

Sales (40,000 standard balls) .. $4,000,000

Less variable expenses ... 2,400,000

Contribution margin .. 1,600,000

Less fixed expenses .. 1,000,000

Net income .. $600,000

Required:

1. Compute the CM per unit and the break-even point in balls.
   1. Due to an increase in labor rates, the company estimates that variable costs will increase by $5 per ball next year. If this change takes place and the selling price per ball remains constant at $100, which will be the new CM per unit and break-even point in balls?
2. Refer to the data in (2) above. If the expected change in variable costs takes place, how many balls will have to be sold next year to earn the same net income ($600,000) as last year?
3. Refer to the original data. The company is discussing the construction of a new, automated plant to manufacture the standard balls. The new plant would slash variable costs per ball by 20%, but it would cause fixed costs to increase by $300,000 in amount per year. If the new plant is built, what would be the companys new CM per unit and new break-even point in balls?

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