Belmain Co. 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 Costs	Estimated Variable Cost (per unit sold)
Production costs:
Direct materials.	--	$50.00
Direct labor..	--	30.00
Factory overhead.	$350,000	6.00
Selling expenses:
Sales salaries and commissions.	340,000	4.00
Advertising	116,000	--
Travel	4,000	--
Miscellaneous selling expense	2,300	1.00
Administrative expenses:
Office and officers salaries..	325,000	--
Supplies..	6,000	4.00
Miscellaneous administrative expense	8,700	1.00
Total	$1,152,000	$96.00

It is expected that 12,000 units will be sold at a price of $240 a unit. Maximum sales within the relevant range are 18,000 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.

BELMAIN CO Estimated In come Statement For the Year Ended December 31, 2016 Sales Cost of goods sold Direct materials Direct labor Factory overhead 600,000 360,000 422,000 Cost of goods sold 1,382,000 Gross profit Expenses: Selling expenses Sales salaries and commissions Advertising Travel Miscellaneous selling expense 388,000 116,000 4,000 14,300 Total selling expenses Administrative expenses Office and officers' salaries Supplies Miscellaneous administrative expense 325,000 54,000 20,700 Total administrative expenses 399,700 Total expenses Income from operations 922,000 $576,000 Contribution margin ratio Sales Units x Unit Variable Cost Variable costs Contribution margin Sales Contribution margin ratio Break-even sales Fixed costs Sale Price Unit Variable Cost - Unit contribution margin Break-even sales (units) Sale price Break-even sales (dollars) 4. For each unit level of sales, enter the total sales dollars and total costs. The chart at right will be plotted as you enter the amounts. After all points are plotted, grab and move the labels provided at the left to identify each area Units Sales Costs $ Cost-Volume-Profit Chart 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 $1 $1 Operating Loss Area Break-Even Point Sales $ -Costs $ Operating Profit Area $0 2000 4000 6000 8000 10000 12000 14000 16000 18000 Units Margin of safety Sale Price x Units Expected sales Break-even point Margin of safety (in dollars) Expected sales Margin of safety (as a percentage of sales) Operating leverage Unit CM $ Units Contribution margin Income from operations Operating leverage