.Contribution margin, break-even sales, cost-volume-profit graph, 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 deapartments during 20Y8. A summary report of these estimates is as follows:

Estimated Fixed Costs 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 commisions 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 graph indicating the break-even sales.

5. Determine the operating leverage.