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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 labor workers. Thus, variable expenses are high, totaling $15 per ball, of which 60% is direct labor cost.

Last year, the company sold 30,000 of these balls, with the following results:

1. 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%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the companys new CM ratio and new break-even point in balls?

2. Refer to the data in (5) above.

   1. If the new plant is built, how many balls will have to be sold next year to earn the same

      net operating income, $90,000, as last year?

   2. Assume the new plant is built and that next year the company manufactures and sells

      30,000 balls (the same number as sold last year). Prepare a contribution format income

      statement and compute the degree of operating leverage.

   3. If you were a member of top management, would you have been in favor of constructing the new plan. Explain.

Sales (30,000 balls) . . . . . . . . . . . . . . . . . . . . .	$750,000
Variable expenses . . . . . . . . . . . . . . . . . . . . . .	450,000
Contribution margin . . . . . . . . . . . . . . . . . . . . .	300,000
Fixed expenses . . . . . . . . . . . . . . . . . . . . . . . .	210,000
Netoperatingincome ....................	$ 90,000

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