Question

Contribution Margin, Break-Even Sales, Cost-Volume-Profit Chart, Margin of Safety, and Operating Leverage

Wolsey Industries Inc. expects to maintain the same inventories
at the end of 20Y3 as at the beginning of the year. The total of
all production costs for the year is therefore assumed to be equal
to the cost of goods sold. With this in mind, the various
department heads were asked to submit estimates of the costs for
their departments during the year. A summary report of these
estimates is as follows:

EstimatedFixed Cost |
Estimated Variable Cost(per unit sold) |
||||||

Production costs: | |||||||

Direct materials | — | $46 | |||||

Direct labor | — | 40 | |||||

Factory overhead | $200,000 | 20 | |||||

Selling expenses: | |||||||

Sales salaries and commissions | 110,000 | 8 | |||||

Advertising | 40,000 | — | |||||

Travel | 12,000 | — | |||||

Miscellaneous selling expense | 7,600 | 1 | |||||

Administrative expenses: | |||||||

Office and officers' salaries | 132,000 | — | |||||

Supplies | 10,000 | 4 | |||||

Miscellaneous administrative expense | 13,400 | 1 | |||||

Total | $525,000 | $120 |

It is expected that 21,875 units will be sold at a price of $160 a unit. Maximum sales within the relevant range are 27,000 units.

**Required:**

**1.** Prepare an estimated income statement for
20Y3.

Wolsey Industries Inc. | |||

Estimated Income Statement | |||

For the Year Ended December 31, 20Y3 | |||

Sales | $ | ||

Cost of goods sold: | |||

Direct materials | $ | ||

Direct labor | |||

Factory overhead | |||

Total cost of goods sold | |||

Gross profit | $ | ||

Expenses: | |||

Selling expenses: | |||

Sales salaries and commissions | $ | ||

Advertising | |||

Travel | |||

Miscellaneous selling expense | |||

Total selling expenses | $ | ||

Administrative expenses: | |||

Office and officers' salaries | $ | ||

Supplies | |||

Miscellaneous administrative expense | |||

Total administrative expenses | |||

Total expenses | |||

Operating income | $ |

Feedback

1. Use the data to compute the total costs. Remember that some of the costs have a fixed and a variable cost component.

**2.** What is the expected contribution margin
ratio?

%

**3.** Determine the break-even sales in units and
dollars.

Units | units |

Dollars |

**4.** Construct a cost-volume-profit chart on your
own paper. What is the break-even sales?

**5.** What is the expected margin of safety in
dollars and as a percentage of sales?

Dollars | $ | |

Percentage | % |

**6.** Determine the operating leverage. **If
required, round your answer to one decimal place, e.g.
15.4.**

Answer #1

Contribution Margin, Break-Even Sales, Cost-Volume-Profit Chart,
Margin of Safety, and Operating Leverage
Belmain Co. expects to maintain the same inventories at the end
of 20Y7 as at the beginning of the year. The total of all
production costs for the year is therefore assumed to be equal to
the cost of goods sold. With this in mind, the various department
heads were asked to submit estimates of the costs for their
departments during the year. A summary report of these...

1.
Margin of Safety
a. If Canace Company, with a break-even point
at $423,400 of sales, has actual sales of $580,000, what is the
margin of safety expressed (1) in dollars and (2) as a percentage
of sales? Round the percentage to the nearest whole number.
1. $
2. %
b. If the margin of safety for Canace Company
was 25%, fixed costs were $1,537,500, and variable costs were 75%
of sales, what was the amount of actual sales (dollars)?...

Break-Even Units, Contribution Margin Ratio, Multiple-Product
Breakeven, Margin of Safety, Degree of Operating Leverage
Jellico Inc.'s projected operating income (based on sales of
450,000 units) for the coming year is as follows:
Total
Sales
$11,700,000
Total variable cost
8,190,000
Contribution margin
$3,510,000
Total fixed cost
2,254,200
Operating income
$1,255,800
Required:
1(a). Compute variable cost per unit. Round
your answer to the nearest cent.
$per unit
1(b). Compute contribution margin per unit.
Round your answer to the nearest cent.
$per unit...

Break-Even Units, Contribution Margin Ratio, Multiple-Product
Breakeven, Margin of Safety, Degree of Operating Leverage
Jellico Inc.'s projected operating income (based on sales of
450,000 units) for the coming year is as follows:
Total
Sales
$ 11,700,000
Total variable cost
6,669,000
Contribution margin
$ 5,031,000
Total fixed cost
2,871,024
Operating income
$ 2,159,976
Required:
1(a). Compute variable cost per unit. Enter
your answer to the nearest cent.
$per unit
1(b). Compute contribution margin per unit.
Enter your answer to the nearest...

Mastery Problem: CVP Analysis - Constructing a
Cost-Volume-Profit Chart
CVP Analysis and the Contribution Margin Income
Statement
For planning and control purposes, managers have a powerful tool
known as cost-volume-profit (CVP) analysis. CVP analysis shows how
revenues, expenses, and profits behave as volume changes, which
helps identify problems and create solutions. In CVP analysis,
costs are classified according to behavior: variable or fixed,
rather than by category: product (which includes both variable and
fixed) or period (which includes both variable...

Mastery
Problem: CVP Analysis - Constructing a Cost-Volume-Profit
Chart
CVP Analysis
and the Contribution Margin Income Statement
For planning and
control purposes, managers have a powerful tool known as
cost-volume-profit (CVP) analysis. CVP analysis shows how revenues,
expenses, and profits behave as volume changes, which helps
identify problems and create solutions. In CVP analysis, costs are
classified according to behavior: variable or fixed, rather than by
category: product (which includes both variable and fixed) or
period (which includes both variable...

Estimated Fixed Cost Estimated Variable Cost (per unit sold)
Production costs: Direct materials $17 Direct labor 12 Factory
overhead $630,400 9 Selling expenses: Sales salaries and
commissions 131,000 4 Advertising 44,300 Travel 9,800 Miscellaneous
selling expense 10,800 3 Administrative expenses: Office and
officers' salaries 128,000 Supplies 15,800 1 Miscellaneous
administrative expense 14,860 2 Total $984,960 $48 It is expected
that 10,640 units will be sold at a price of $192 a unit. Maximum
sales within the relevant range are 13,000...

Break-Even Units, Contribution Margin Ratio, Margin of
Safety
Khumbu Company's projected profit for the coming year is as
follows:
Total
Per Unit
Sales
$3,331,250
$41.00
Total variable cost
999,375
12.30
Contribution
margin
$ 2,331,875
$ 28.7
Total fixed cost
1,009,369
Operating income
$ 1,322,506
Required:
1. Compute the break-even point in units. If
required, round your answer to nearest whole value.
units
2. How many units must be sold to earn a profit
of $240,000? If required, round your answer...

Break-Even Units, Contribution Margin Ratio, Margin of
Safety
Khumbu Company's projected profit for the coming year is as
follows:
Total
Per Unit
Sales
$2,030,000
$40.00
Total variable cost
568,400
11.20
Contribution margin
$ 1,461,600
$ 28.8
Total fixed cost
539,980
Operating income
$ 921,620
Required:
1. Compute the break-even point in units. If
required, round your answer to nearest whole value.
units
2. How many units must be sold to earn a profit
of $240,000? If required, round your answer...

Break-Even Units,
Contribution Margin Ratio, Margin of Safety
Khumbu Company's
projected profit for the coming year is as follows:
Total
Per Unit
Sales
$3,150,000
$45.00
Total variable cost
819,000
11.70
Contribution
margin
$2,331,000
$ 33.3
Total fixed cost
819,000
Operating income
$1,512,000
Required:
1.
Compute the break-even point in units. If required, round your
answer to nearest whole value.
______ units
2.
How many units must be sold to earn a profit of $240,000? If
required, round your answer to...

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