Tyrene Products manufactures recreational equipment. One of the company’s products, a skateboard, sells for $37.50. The skateboards are manufactured in an antiquated plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling $22.50 per skateboard. Over the past year the company sold 40,000 skateboards, with the following operating results:
Sales (40,000 skateboards) . . . . . . . . . . $1,500,000
Variable expenses . . . . . . . . . . . . . . . . . 900,000
Contribution margin . . . . . . . . . . . . . . . . 600,000
Fixed expenses . . . . . . . . . . . . . . . . . . . 480,000
Net operating income . . . . . . . . . . . . . . . $ 120,000
Management is anxious to maintain and perhaps even improve its present level of income from the skateboards.

Required:
1. Compute (a) the CM ratio and the break-even point in skateboards, and (b) the degree of operating leverage at last year’s level of sales.
2. Due to an increase in labor rates, the company estimates that variable costs will increase by $3 per skateboard next year. If this change takes place and the selling price per skateboard remains constant at $37.50, what will be the new CM ratio and the new break-even point in skateboards?
3. Refer to the data in (2) above. If the expected change in variable costs takes place, how many skateboards will have to be sold next year to earn the same net operating income ($120,000) as last year?
4. Refer again to the data in (2) above. The president has decided that the company may have to raise the selling price of its skateboards. If Tyrene Products wants to maintain the same CM ratio as last year, what selling price per skateboard must it charge next year to cover the increased labor costs?
5. Refer to the original data. The company is considering the construction of a new, automated plant. The new plant would slash variable costs by 40%, but it would cause fixed costs to increase by 90%. If the new plant is built, what would be the company’s new CM ratio and new breakeven point in skateboards?
6. Refer to the data in (5) above.
a. If the new plant is built, how many skateboards will have to be sold next year to earn the same net operating income, $120,000, as last year?
b. Assume that the new plant is constructed and that next year the company manufactures and sells 40,000 skateboards (the same number as sold last year). Prepare a contribution format income statement, and compute the degree of operating leverage.
c. If you were a member of top management, would you have been in favor of constructing the new plant? Explain.