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				$17
	Direct labor				12
	Factory overhead	$81,100			9
Selling expenses:
	Sales salaries and commissions	16,900			4
	Advertising	5,700
	Travel	1,300
	Miscellaneous selling expense	1,400			3
Administrative expenses:
	Office and officers' salaries	16,500
	Supplies	2,000			1
	Miscellaneous administrative expense	1,820			2
	Total	$126,720			$48

It is expected that 5,940 units will be sold at a price of $96 a unit. Maximum sales within the relevant range are 7,000 units.

Required:

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1. Prepare an estimated income statement for 20Y7.

Belmain Co. Estimated Income Statement For the Year Ended December 31, 20Y7

Direct materialsOperating incomeMiscellaneous administrative expenseSales salaries and commissionsSalesSales			$Sales
Cost of goods sold:
Direct materialsOperating incomeSalesSuppliesTravelDirect materials		$Direct materials
AdvertisingDirect laborOperating incomeLoss from operationsOffice and officers' salariesDirect labor		Direct labor
Factory overheadMiscellaneous administrative expenseSalesSuppliesTravelFactory overhead		Factory overhead
Total cost of goods sold			fill in the blank bea5da0cffc2fa6_9
Gross profit			$fill in the blank bea5da0cffc2fa6_10
Expenses:
Selling expenses:
Factory overheadOperating incomeMiscellaneous administrative expenseSales salaries and commissionsSalesSales salaries and commissions	$Sales salaries and commissions
AdvertisingCost of goods manufacturedDirect materialsOffice and officers' salariesSalesAdvertising	Advertising
Direct laborFactory overheadSalesSuppliesTravelTravel	Travel
Direct materialsMiscellaneous administrative expenseMiscellaneous selling expenseSalesSuppliesMiscellaneous selling expense	Miscellaneous selling expense
Total selling expenses		$fill in the blank bea5da0cffc2fa6_19
Administrative expenses:
AdvertisingDirect laborOffice and officers' salariesSales salaries and commissionsTravelOffice and officers' salaries	$Office and officers' salaries
Direct materialsFactory overheadSalesSuppliesTravelSupplies	Supplies
Direct materialsMiscellaneous administrative expenseMiscellaneous selling expenseSales salaries and commissionsSalesMiscellaneous administrative expense	Miscellaneous administrative expense
Total administrative expenses		fill in the blank bea5da0cffc2fa6_26
Total expenses			fill in the blank bea5da0cffc2fa6_27
Operating income			$fill in the blank bea5da0cffc2fa6_28

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1. Use the data to compute the total costs. Remember that some of the costs have a fixed and a variable cost component.

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2. What is the expected contribution margin ratio? Round to the nearest whole percent. fill in the blank 8fd3fafbb047fc9_1 %

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

Units	fill in the blank 8fd3fafbb047fc9_2 units
Dollars	$fill in the blank 8fd3fafbb047fc9_3

4. Construct a cost-volume-profit chart on your own paper. What is the break-even sales? $ fill in the blank 8fd3fafbb047fc9_4

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

Dollars:	$fill in the blank 8fd3fafbb047fc9_5
Percentage: (Round to the nearest whole percent.)	fill in the blank 8fd3fafbb047fc9_6	%

6. Determine the operating leverage. Round to one decimal place. fill in the blank 8fd3fafbb047fc9_7