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:

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 two estimated income statements (for both variable and absorption) for 20Y7.

2. What is the expected contribution margin ratio?

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

4. What is the expected margin of safety in dollars and as a percentage of sales? (Round to one decimal place.)

5. Determine the operating leverage.

Estimated Fixed Cost Estimated Variable Cost (per unit sold) $50.00 30.00 6.00 $ 350,000 4.00 Production costs: Direct materials Direct labor..... Factory overhead Selling expenses: Sales salaries and commissions... Advertising Travel ..... Miscellaneous selling expense Administrative expenses: Office and officers' salaries Supplies...... Miscellaneous administrative expense. Total ..... 340,000 116,000 4,000 2,300 1.00 325,000 6,000 8,700 $1,152,000 4.00 1.00 596.00