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:

		Estimated Fixed 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