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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:

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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 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 004b07fb1f8203c_9
Gross profit			$fill in the blank 004b07fb1f8203c_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 004b07fb1f8203c_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 004b07fb1f8203c_26
Total expenses			fill in the blank 004b07fb1f8203c_27
Operating income			$fill in the blank 004b07fb1f8203c_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? fill in the blank 45651cf6af92f84_1 %

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

Units	fill in the blank 45651cf6af92f84_2 units
Dollars	$1,800,000$1,920,000$2,100,000$2,250,000$2,100,000

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$2,100,000

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

Dollars	$fill in the blank 45651cf6af92f84_5
Percentage (If required, round the percent to one decimal place, e.g. 15.4%.)	fill in the blank 45651cf6af92f84_6	%

6. Determine the operating leverage. If required, round your answer to one decimal place, e.g. 15.4. fill in the blank 45651cf6af92f84_7

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

3. Fixed costs divided by unit contribution margin equals break-even sales 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 point) divided by sales equals margin of safety.

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

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