Contribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverage

Organic Health Care Products Inc. expects to maintain the same inventories at the end of 20Y8 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 20Y8. A summary report of these estimates is as follows:

	Estimated fixed cost	Estimated variable cost (per unit sold)
Production costs:
Direct materials	-	$8.00
Direct labor	-	3.00
Factory overhead	$200,000	1.50
Selling expenses:
Advertising	1,450,000	-
Sales salaries and commissions	93,000	1.85
Travel	340,000	-
Miscellaneous selling expense	2,000	0.10
Administrative expenses:
Office and officers' salaries	300,000	-
Supplies	10,000	0.50
Miscellaneous administrative expense	5,000	0.05
Total	$2,400,000	$15.00

It is expected that 400,000 units will be sold at a price of $25 a unit. Maximum sales within the relevant range are 500,000 units.

Instructions:

1. Prepare an estimated income statement for 20Y8.

2. What is the expected contribution margin ratio?

3. Determine the break-even sales in units.

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.