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				$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.

Answer 1

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