Contribution margin, break-even sales, cost-volume-profit chart, OBJ. 2, 3, 4, 5 margin of safety, and operating leverage Wolsey Industries Inc. expects to maintain the same inventories at the end of 2016 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ 46 Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 40 Factory overhead. . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000 20 Selling expenses:

Sales salaries and commissions. . . . . . . . . . . . . . . 110,000 8 Advertising. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 —

Travel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 —

Miscellaneous selling expense. . . . . . . . . . . . . . . 7,600 1 Administrative expenses:

Office and officers’ salaries. . . . . . . . . . . . . . . . . . . 132,000 —

Supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 4 Miscellaneous administrative expense. . . . . . . . . 13,400 1 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $525,000 $120 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.

Instructions 1. Prepare an estimated income statement for 2016.

2. What is the expected contribution margin ratio?

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

4. Construct a cost-volume-profit chart indicating 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.