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G H Problem 1: Carmen Inc. expects to maintain the same inventories at the end of 20YY 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: 5 6 Production costs Fixed VC per unit Direct materials 20 o Direct labor 22 1 Factory overhead 120,700 15 2 Expenses 3 Selling expenses 4 Sales salaries and commissions 32,000 5 Advertising 10,000 6 Travel 2,200 7 Miscellaneous selling expenses 1,800 3 Administrative expenses 9 Office and officers' salaries 42,800 Supplies 5,500 2 Miscellaneous. admin expenses 5,000 2 2 Total 220,000 72 3 4 Number of units sold 8,000 units s Selling price per unit 160 per unit 6 Relevant range of production and sales: 10,000 units 7 Required: 9 A. Prepare an estimated income statement for 20YY using the traditional format of income statement. B. What is the expected contribution margin ratio? 1 C. Determine the break-even sales in units and dollars. 2 D. What is the expected margin of safety (MOS) in dollars and as a percentage of sales? 3 E. Determine the operating leverage. Round your answer to two decimal points. 4. B D E F 8 s Solution: 6 A. Traditional Income statement -7 Carmen Inc. Estimated Income Statement 9 For the Year Ended December 31, 20YY 0 Sales -1 COGS 2 DM 3 DL 4 Factory OH: 5 Total COGS -6 Gross Profit 7 Expenses 8 Selling Expenses 9 Sales salaries and commissions o Advertising 1 Travel -2 Misc. selling expenses 3 Total selling expenses 4 Administrative expenses -5 Office and officers' salaries -6 Supplies -7 Misc. admin Expenses 8 Total administrative expenses -9 Total expenses 0 Operating income -1 2 B. Contribution Margin Ratio (CMR) 3 CMR = CMU/SP per unit 4 CMU 5 CMR (express in %) -6 7 C. Break-even sales in units and dollars: 8 BEU = FC/CMU units 9 BES = FC/CMR "O 1 D. Margin of safety in $ and as a % of sales 2 MOS in $ = Sales - BE$ 3 MOS as % of sales = MOS in $/Sales 4 5 E. Operating leverage (OL) 6 OL = CM/NI 7 CM = CMU x # of units sold 8 Operating leverage = per unit