break even point with that in part (1). Why is it so different? PR 4-6A 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 Estimated Variable Cost Fixed 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 Advertising. 40,000 12,000 Miscellaneous selling expense 7,600 Administrative expenses: Office and officers' salaries 132,000 Supplies.... 10,000 Miscellaneous administrative expense. 13,400 $525,000 $120 8 Travel ...... 1 4 1 Total ... 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. WOL SEY INDUSTRIES INC. Estimated Income Statement For the Year Ended December 31, 2016 Sales Cost of goods sold Direct materials Direct labor Factory overhead Cost of goods sold Gross profit Expenses Selling expenses Sales salaries and commissions Advertising Travel Miscellaneous selling expense Total selling expenses Administrative expenses Office and officers' salaries Supplies Miscellaneous administrative expense Total administrative expenses Total expenses Income from operations 2. Contribution margin ratio Sales Units x Unit Variable Cost Variable costs Contribution margin Sales Contribution margin ratio 3. Pr. 19(4)-6A Calculate B C D E F G H M Break-even sales Fixed costs Sale Price Unit Variable Cost Unit contribution margin Break-even sales (units) Sale price Break-even sales (dollars) 9 -0 51 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 52 After all points are plotted, grab and move the labels provided at the left to identify each area. 53 Sales $ Costs $ Cost-Vo Units 0 3,000 6,000 9,000 12,000 15,000 18,000 21,000 24,000 27,000 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 Operating Loss Area Break-Even Point Operating Profit Area 0 3 000 6,000 9,000 12,000 15,000 12 Units Pr. 19(4) GA Home Insert Page Layout Formulas Data Review View Tell me what you want to do... * Arial 10 - AA Wrap Text B I U Merge & Center $ - % 40 00 .00 Condit Format Dard Font Alignment Number f 4 B C D E F G H J K 5. Units Margin of safety Sale Price Expected sales Break-even point Margin of safety (in dollars) Expected sales Margin of safety (as a percentage of sales) 6. Operating leverage: Unit CMS X Units Contribution margin Income from operations Operating leverage 3 4 5 16 17 18 19 20 21 22 23 124 125