Chapter 5 - Cost-Volume-Profit Relationships Part II
Module 4 - Homework Assignment (SHOW ALL WORK FOR FULL POINTS!)
Problem 1 (25 points, each worth 5 points)
Clifton Company manufactures a decorative lawn ornament selling for $20 per unit in a small plant heavily relying on direct labor workers. Thus, variable expenses are high, totaling $12 per ornament, of which 60% is direct labor costs. Fixed Expenses are $150,000.
Last year, the company sold 25,000 ornaments, with the following results:
1. Compute (a) last year's CM ratio and break-even point in balls and (b) the degree of operating leverage at last year's sales level (all work must be shown including Formulas).
2. Due to an increase in labor rates, the company estimates next year's variable expenses will increase to by $3 per ornament. If this change takes place and the selling price per ornament remains constant at $20, what will be next year's CM ratio, break-point in ornaments and sales dollars (all work must be shown including formulas).
3. Refer again to the data in (2) above. If the expected change in variable expenses takes place, how many ornaments will have to be sold next year to earn the same net operating income of $90,000 (all work must be shown including formulas).
4. Refer again to the data in (2) above. The president feels the company must raise the selling price of its ornaments. If Clifton Company wants to maintain the same CM ratio as last year (as computed in requirement 1a.), what selling price per ball must it charge next year to cover the increased labor costs (all work must be shown including formulas).
5. Refer to the original data. The company is discussing the construction of new, automated manufacturing plant. The new plant would slash variable expenses per ornaments by 40%, 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 ornaments (show all work including formulas).