Contribution Margin, Break-Even Sales, Cost-Volume-Profit Chart, Margin of Safety, and Operating Leverage

Wolsey Industries Inc. expects to maintain the same inventories at the end of 20Y3 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				$46
	Direct labor				40
	Factory overhead	$200,000			20
Selling expenses:
	Sales salaries and commissions	110,000			8
	Advertising	40,000
	Travel	12,000
	Miscellaneous selling expense	7,600			1
Administrative expenses:
	Office and officers' salaries	132,000
	Supplies	10,000			4
	Miscellaneous administrative expense	13,400			1
Total		$525,000			$120

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.

Required:

Question Content Area

1. Prepare an estimated income statement for 20Y3.

Wolsey Industries Inc. Estimated Income Statement For the Year Ended December 31, 20Y3

Direct materialsOperating incomeMiscellaneous administrative expenseSales salaries and commissionsSales			$- Select -
Cost of goods sold:
Direct materialsOperating incomeSalesSuppliesTravel		$- Select -
AdvertisingDirect laborOperating incomeLoss from operationsOffice and officers' salaries		- Select -
Factory overheadMiscellaneous administrative expenseSalesSuppliesTravel		- Select -
Total cost of goods sold			fill in the blank 4e5f47f61fd8ff6_9
Gross profit			$fill in the blank 4e5f47f61fd8ff6_10
Expenses:
Selling expenses:
Factory overheadOperating incomeMiscellaneous administrative expenseSales salaries and commissionsSales	$- Select -
AdvertisingCost of goods manufacturedDirect materialsOffice and officers' salariesSales	- Select -
Direct laborFactory overheadSalesSuppliesTravel	- Select -
Direct materialsMiscellaneous administrative expenseMiscellaneous selling expenseSalesSupplies	- Select -
Total selling expenses		$fill in the blank 4e5f47f61fd8ff6_19
Administrative expenses:
AdvertisingDirect laborOffice and officers' salariesSales salaries and commissionsTravel	$- Select -
Direct materialsFactory overheadSalesSuppliesTravel	- Select -
Direct materialsMiscellaneous administrative expenseMiscellaneous selling expenseSales salaries and commissionsSales	- Select -
Total administrative expenses		fill in the blank 4e5f47f61fd8ff6_26
Total expenses			fill in the blank 4e5f47f61fd8ff6_27
Operating income			$fill in the blank 4e5f47f61fd8ff6_28

Question Content Area

2. What is the expected contribution margin ratio? fill in the blank 26c3bd0d602e010_1 %

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

Units	fill in the blank 26c3bd0d602e010_2 units
Dollars	$1,800,000$1,920,000$2,100,000$2,250,000

4. Construct a cost-volume-profit chart on your own paper. What is the break-even sales?

$1,800,000$1,920,000$2,100,000$2,250,000

5. What is the expected margin of safety in dollars and as a percentage of sales?

Dollars	$fill in the blank 26c3bd0d602e010_5
Percentage (If required, round the percent to one decimal place, e.g. 15.4%.)	fill in the blank 26c3bd0d602e010_6	%

6. Determine the operating leverage. If required, round your answer to one decimal place, e.g. 15.4. fill in the blank 26c3bd0d602e010_7