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				$28
	Direct labor				19
	Factory overhead	$377,400			14
Selling expenses:
	Sales salaries and commissions	78,400			6
	Advertising	26,500
	Travel	5,900
	Miscellaneous selling expense	6,500			6
Administrative expenses:
	Office and officers' salaries	76,700
	Supplies	9,400			2
	Miscellaneous administrative expense	8,880			3
	Total	$589,680			$78

It is expected that 11,760 units will be sold at a price of $156 a unit. Maximum sales within the relevant range are 15,000 units.

Required:

1. Prepare an estimated income statement for 20Y7.

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

Feedback

1. Use the absorption costing format.

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	units

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.

Feedback

2. Sales minus variable costs equals contribution margin. Contribution margin divided by sales equals contribution margin ratio.

3. Fixed costs divided by unit contribution margin equals break-even point in units. Break-even units times unit sale price equals break-even dollars.

4. Draw lines for total costs and total sales. The two lines should intersect at the break-even point.

5. (Sales minus sales at break-even) divided by sales equals margin of safety.

6. Contribution margin divided by the income from operations equals operating leverage.