Question

# Contribution Margin, Break-Even Sales, Cost-Volume-Profit Chart, Margin of Safety, and Operating Leverage Belmain Co. expects to...

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 \$28 Direct labor 19 Factory overhead \$475,200 14 Selling expenses: Sales salaries and commissions 98,800 6 Advertising 33,400 Travel 7,400 Miscellaneous selling expense 8,200 6 Administrative expenses: Office and officers' salaries 96,500 Supplies 11,900 2 Miscellaneous administrative expense 11,160 3 Total \$742,560 \$78

It is expected that 7,480 units will be sold at a price of \$260 a unit. Maximum sales within the relevant range are 9,000 units.

Required:

1. Prepare an estimated income statement for 20Y7.

 Belmain Co. Estimated Income Statement For the Year Ended December 31, 20Y7 \$ Cost of goods sold: \$ Cost of goods sold Gross profit \$ Expenses: Selling expenses: \$ Total selling expenses \$ Administrative expenses: \$ Total administrative expenses Total expenses Income from operations \$

2. What is the expected contribution margin ratio? Round to the nearest whole percent.
%

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

 Units units Dollars units

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: (Round to the nearest whole percent.) %

6. Determine the operating leverage. Round to one decimal place.

1. Prepare an estimated income statement for 20Y7.

 Belmain Co. Estimated Income statement For the Year Ended December 31, 20Y7 Sales (7480 * \$260) \$1944800 Cost of goods sold: Direct Materials (7480 * \$28) \$209440 Direct Labor (7480 * \$19) \$142120 Factory Overhead (\$475200) + (\$14 * 7480) \$579920 Cost of goods sold \$931480 Gross profit \$1013320 Expenses: Selling expenses: Sales salaries and commissions (\$98800) + (\$6 * 7480) \$143680 Advertising \$33400 Travel \$7400 Misc. Selling Expense (\$8200) + (\$6 * 7480) \$53080 Total selling expenses \$237560 Administrative expenses: Office and officers' salaries \$96500 Supplies (\$11900) + (\$2 * 7480) \$26860 Misc. administrative expense (\$11160) + (\$3 * 7480) \$33600 Total administrative expenses \$156960 Total expenses \$394520 Income from operations \$618800

2. What is the expected contribution margin ratio? Round to the nearest whole percent.

(SP pu – VC pu)/SP pu * 100

(\$260 - \$78)/\$260 * 100 = 70%

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

In units = Fixed cost/Contribution per unit

= \$742560/(\$260-\$78) = 4080 units

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

4080 * \$260 = \$1060800

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

In dollars = Actual sale – BEP sale

\$1944800 - \$1060800 = \$884000

In percentage = MOS in dollars/Actual sale * 100

= \$884000/\$1944800 * 100 = 45%

6. Determine the operating leverage. Round to one decimal place.

Contribution/Income from operations

Contribution = 7480 * (\$260 - \$78) = \$1361360

Income from operations = \$618800

\$1361360/\$618800 = 2.2