30,000 = 1,875) than now being sold to earn a profit of $90,000 per
year. However, this is still far less than the 42,857 balls that would
have to be sold to earn a $90,000 profit if the plant is not automated
and variable labor costs rise next year [see Part (3) above].
b. The contribution income statement would be:
Sales (30,000 balls × $25 per ball) ... $750,000
Less variable expenses (30,000 balls × $9 per ball)... 270,000
Contribution margin... 480,000
Less fixed expenses... 420,000
Net operating income... $ 60,000
Contribution margin
Degree of =
operating leverage Net operating income
$480,000
= =8
$60,000
Problem 6-24 (continued)
c. This problem illustrates the difficulty faced by many companies today.
Variable costs for labor are rising, yet because of competitive pres-
sures it is often difficult to pass these cost increases along in the form
of a higher price for products. Thus, companies are forced to auto-
mate (to some degree) resulting in higher operating leverage, often a
higher break-even point, and greater risk for the company.
There is no clear answer as to whether one should have been in favor
of constructing the new plant. However, this question provides an op-
portunity to bring out points such as in the preceding paragraph and
it forces students to think about the issues.
Problem 6-25 (60 minutes)
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