Question

Contribution Margin, Break-Even Sales, Cost-Volume-Profit Chart, Margin of Safety, and Operating Leverage

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	—			$13
	Direct labor	—			9
	Factory overhead	$154,800			6
Selling expenses:
	Sales salaries and commissions	32,200			3
	Advertising	10,900			—
	Travel	2,400			—
	Miscellaneous selling expense	2,700			3
Administrative expenses:
	Office and officers' salaries	31,400			—
	Supplies	3,900			1
	Miscellaneous administrative expense	3,620			1
	Total	$241,920			$36

It is expected that 6,480 units will be sold at a price of $120 a unit. Maximum sales within the relevant range are 8,000 units.

Required:

1. Prepare an estimated income statement for 20Y7.

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.

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

777,600 336,240 441,360 Belmain Co. Estimated Income Statement For the Year Ended December 31, 20Y7 Sales Cost of goods sold: Direct materials 84,240 Direct labor 58,320 Factory overhead 193,680 Total cost of goods sold Gross profit Expenses: Selling expenses: Sales salaries and commissions 51,640 Advertising 10,900 Travel 2,400 Misc. selling expenses 22,140 Total selling expenses 87,080 Administrative expenses: Office and officers' salaries 31,400 Supplies 10,380 Miscellaneous administrative expense 10,100 Total administrative expenses 51,880 Total expenses Income from operations 138,960 302,400

32 2. What is the expected contribution margin ratio? Sales Less Variable Expenses Contribution Margin 120 (36) 84 Contribution Margin Ratio = Contribution Margin Sales 84 120 Contribution Margin Ratio = 70% 46 3. Determine the break-even sales in units and dollars. Breakeven sales in Units = Fixed Expenses Contribution Margin Per Unit 241,920 84 Breakeven sales in Units = 2,880 Units

Breakeven sales in Units Selling Price Per Unit Breakeven sales in dollars 2,880 120 345,600 = 63 61 4. Construct a cost-volume-profit chart on your own paper. What is the break-even sales? 62 345,600 64 65 5. What is the expected margin of safety in dollars and as a percentage of sales? 66 Actual Sales 777,600 Less Break-even sales Revenue 345,600 Margin of Safety 432000 Margin of Safety as a % of sales Margin of Safety Sales 432000 777,600 Margin of Safety as a % of sales 56%

79 6. Determine the operating leverage. Operating leverage Contribution Margin Income From Operations 544,320 302,400 Operating leverage 1.8