Question

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 estimates is as follows:

		Estimated Fixed Cost			Estimated Variable Cost (per unit sold)
Production costs:
	Direct materials	—			$19
	Direct labor	—			13
	Factory overhead	$321,400			10
Selling expenses:
	Sales salaries and commissions	66,800			4
	Advertising	22,600			—
	Travel	5,000			—
	Miscellaneous selling expense	5,500			4
Administrative expenses:
	Office and officers' salaries	65,300			—
	Supplies	8,000			2
	Miscellaneous administrative expense	7,600			2
	Total	$502,200			$54

It is expected that 6,200 units will be sold at a price of $216 a unit. Maximum sales within the relevant range are 8,000 units.

Required:

1. Prepare an estimated income statement for 20Y7.

Belmain Co.
Estimated Income Statement
For the Year Ended December 31, 20Y7
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			$

Answer 1