Question

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 — $17 Direct labor — 12 Factory overhead $251,600 9 Selling expenses: Sales salaries and commissions 52,300 4 Advertising 17,700 — Travel 3,900 — Miscellaneous selling expense 4,300 3 Administrative expenses: Office and officers' salaries 51,100 — Supplies 6,300 1 Miscellaneous administrative expense 5,920 2 Total $393,120 $48 It is expected that 9,360 units will be sold at a price of $120 a unit. Maximum sales within the relevant range are 12,000 units. Required:

1. Prepare an estimated income statement for 20Y7. Belmain Co. Estimated Income Statement For the Year Ended December 31, 20Y7 $ Cost of goods sold: $ Total cost of goods sold Gross profit $ Expenses: Selling expenses: $ Total selling expenses $ Administrative expenses: $ Total administrative expenses Total expenses Operating income $ 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 $ 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.

Answer 1

BELMAIN CO. Estimated Income Statement For the Year Ended December 31, 20Y7
Sales (9360*120)			1123200
Cost of goods sold:
Direct materials (9360*17)		159120
Direct labor (9360*12)		112320
Factory overhead ((9360*9)+251600)		335840
Cost of goods sold			607280
Gross profit			515920
Expenses:
Selling expenses:
Sales salaries and commissions ((9360*4)+52300)	89740
Advertising	17700
Travel	3900
Miscellaneous selling expense ((9360*3)+4300)	32380
Total selling expenses		143720
Administrative expenses:
Office and officers’ salaries	51100
Supplies ((9360*1)+6300)	15660
Miscellaneous administrative expense ((9360*2)+5920)	24640
Total administrative expenses		91400
Total expenses			235120
Income from operations			$280800

Part 2

Contribution margin ratio = (Sales–Variable Costs)/ sales = (1123200-(9360*(17+12+9+4+3+1+2)))/1123200 = 60%

Part 3

Break-Even Sales (units) = Fixed Costs/unit contribution margin = (251600+52300+17700+3900+4300+51100+6300+5920)/(120-48) = 393120/72 = 5460 units

Break-Even Sales (dollars) = fixed costs / contribution margin ratio = 393120/60% =$655200

Part 4

2000 -249120 400000 2500 -213120 3000 -177120 300000 3500 -141120 4000 -105120 200000 4500 -69120 5000 -33120 100000 5500 2880 6000 38880 0 6500 74880 4000 2000 6000 8000 10000 7000 110880 -100000 7500 146880 8000 182880 -200000 8500 218880 9000 254880 -300000 9500 290880

Part 5

Margin of safety (In dollars) = expected sales – break-even point = 1123200 – 655200 = $468000

Margin of Safety (As a percentage of sales) = (sales – Sales at Break-Even Point)/sales = 468000/1123200 = 42%

Part 6

Operating Leverage =Contribution Margin / Income from Operations = (9360*(120-48))/ 280800 = 2.4