Question

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)?
(Hint: Determine the break-even in sales dollars first.)
$

2.

Wolsey Industries Inc. expects to maintain the same inventories at the end of 20Y8 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:

1		Estimated Fixed Cost	Estimated Variable Cost (per unit sold)
2	Production costs:
3	Direct materials	—	$46.00
4	Direct labor	—	40.00
5	Factory overhead	$188,000.00	20.00
6	Selling expenses:
7	Sales salaries and commissions	103,000.00	8.00
8	Advertising	39,000.00	—
9	Travel	14,000.00	—
10	Miscellaneous selling expense	8,000.00	1.00
11	Administrative expenses:
12	Office and officers’ salaries	133,200.00	—
13	Supplies	11,000.00	4.00
14	Miscellaneous administrative expense	15,000.00	1.00
15	Total	$511,200.00	$120.00

It is expected that 21,300 units will be sold at a price of $160 a unit. Maximum sales within the relevant range are 26,100 units.

	Required:
A.	Prepare an estimated income statement for 20Y8. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries. Be sure to complete the statement heading.
B.	What is the expected contribution margin ratio?
C.	Determine the break-even sales in units and dollars. Round your answers to the nearest whole number.
D.	Construct a cost-volume-profit chart on your own paper. What is the break-even sales?
E.	What is the expected margin of safety in dollars and as a percentage of sales? Round your answers to the nearest whole number.
F.	Determine the operating leverage. Round to one decimal place.

Answer 1

1a.

Particulars	Total
Actual Sales (a)	580,000
Break Even sales (b)	423,400
Margin of safety (Total sales minus break even sales) (c )	156,600
Margin of safety (as a percentage of sales) c/a*100	27%

1b.

Particulars	Total
Margin of safety	25%
Fixed Costs	1,537,500
Variable Costs (75% of sales)
Actual Sales (dollars
Break even sales in dollars (Fixed Costs/Contribution Margin Ratio )	6,150,000
Contribution Margin percentage is 100%-75%
Now MOS is Actual Sales minus break even sales so Actual Sales is equal to Break even sales + MOS
25%	Actual Sales - 6,150,000/ Actual Sales
.25 Actual sales= Actual Sales - 6,150,000
Actual Sales =	8,200,000