Northwood Company Manufactures basketballs. The company has a ball that sells for $25. At present,...
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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 labour workers. Therefore, the variable costs are high, totaling $15 per ball. Assuming that the new plant is built and the next year the manufactures and sells 30,000 balls (the same number as sold last year). The contribution income is: Sales - 750,000, less: variable expenses - 270,000. Thus, contribution margin is 480,000, less fixed expenses: 420,000. Net Income would be $60,000.
Degree of operating leverage is 480,000/60,000 = 8.00
If you were a member of top management, would you have been in favor of constructing the new plant? Explain.
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