P11-6 Contribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverage Organic Health Care Products Inc. expects to maintain the same inventories at the end of 2012 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 2012. A summary report of these estimates is as follows: Estimated Fixed Cost 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 commissions 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 On the attaches page, 1. Prepare an estimated income statement for 2012. 2. What is the expected contribution margin ratio? 3. Determine the break-even sales in units. 4. Construct a cost-volume-profit chart indicating the break-even sales. 5. What is the expected margin of safety in dollars and as a percentage of sales? 6. Determine the operating leverage

Problem 11-6 Name: Section: Score: 0% Key Code: 2 Instructions Answers are entered in the cells with gray backgrounds. Cells with non-gray backgrounds are protected and cannot be edited. A red asterisk (*) will appear beside, above, or immediately below an incorrect answer. 1. ORGANIC HEALTH CARE PRODUCTS INC. Estimated Income Statement For the Year Ending December 31, 2012 Sales Cost of goods sold: Direct materials Direct labor Factory overhead Cost of goods sold Gross profit Operating 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 2. - Contribution margin ratio = = 3. Break-even sales (units) = Break-even sales (dollars) = 4. = = sales Use the Autoshapes line feature to construct a cost-volume-profit chart indicating the break-even point. Click and drag either of the lines to sketch the total revenue and total cost functions on the graph. This requirement is not automatically scored. $15,000,000 $12,500,000 $10,000,000 $7,500,000 $5,000,000 $2,500,000 $0 0 100,000 5. Margin of safety: Expected sales (in dollars) Break-even point (in dollars) Margin of safety (in dollars) or Margin of safety (in percent) = = 6. Operating leverage = = 200,000 300,000 400,000 500,000 600,000