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 62,000 of these balls, with the following results: Sales (62,000 balls) $ 1,550,000 Variable expenses 930,000 Contribution margin 620,000 Fixed expenses 426,000 Net operating income $ 194,000 Required: 1. Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year’s sales level.

Instructions are listed below.

Explanation:

Giving the following information:

The company has a ball that sells for $25.

Unitary variable cost= $15.00

Fixed expenses= 426,000

The contribution margin ratio is the contribution margin expressed as a percentage. It is the percentage of sales available to cover the fixed expense. It is calculated using the following formula:

Contribution margin ratio= (selling price - unitary variable cost)/selling price

Contribution margin ratio= (25 - 15)/25= 0.4

Break-even point (units)= fixed costs/ contribution margin

Break-even point (units)= 426,000/10= 42,600 units

The degree of operating leverage helps to determine how income changes in response to change in sales.

Degree of operating leverage= total contribution margin / (total contribution margin - fixed cost)

Degree of operating leverage= (62,000*10) / [(62,000*10) - 426,000]

Degree of operating leverage= 3.20

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