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 $26

Direct labor 17

Factory overhead$456,200 13

Selling expenses:

Sales salaries and commissions94,800 6

Advertising32,100

Travel7,100

Miscellaneous selling expense7,800 5

Administrative expenses:

Office and officers' salaries92,700

Supplies11,400 2

Miscellaneous administrative expense10,700 3

Total$712,800 $72

It is expected that 9,900 units will be sold at a price of $180 a unit. Maximum sales within the relevant range are 12,000 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:

$

Total cost of goods sold

Gross profit$

Expenses:

Selling expenses:

$

Total selling expenses$

Administrative expenses:

$

Total administrative expenses

Total expenses

Operating income$

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$

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.