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 Variable Cost
(per unit sold)
|Sales salaries and commissions||110,000||8|
|Miscellaneous selling expense||7,600||1|
|Office and officers' salaries||132,000||—|
|Miscellaneous administrative expense||13,400||1|
It is expected that 21,875 units will be sold at a price of $160 a unit. Maximum sales within the relevant range are 27,000 units.
1. Prepare an estimated income statement for 20Y3.
|Wolsey Industries Inc.|
|Estimated Income Statement|
|For the Year Ended December 31, 20Y3|
|Cost of goods sold:|
|Total cost of goods sold|
|Sales salaries and commissions||$|
|Miscellaneous selling expense|
|Total selling expenses||$|
|Office and officers' salaries||$|
|Miscellaneous administrative expense|
|Total administrative expenses|
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
3. Determine the break-even sales in units and 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?
6. Determine the operating leverage. If required, round your answer to one decimal place, e.g. 15.4.
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