Question

Contribution Margin, Break-Even Sales, Cost-Volume-Profit Graph, and Operating Leverage Organic Health Care Products Inc. expects to maintain the same inventories at the end of 2048 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 2018. A summary report of these estimates is as follows: Estimated Fixed Cost Estimated Variable Cost (per unit sold) $460,300 Production costs: Direct materials Direct labor Factory overhead Selling expenses: Advertising Sales salaries and commissions Travel Miscellaneous selling expense Administrative expenses: Office and officers salaries Supplies 32,400 95,700 7,200 7,900 93,500 11,500 10,780 $719,280 Miscellaneous administrative expense Total It is expected that 10,360 units will be sold at a price of $180 a unit. Maximum sales within the relevant range are 13,000 units. Instructions: 1. Prepare an estimated Income statement for 2018 Organic Health Care Products Inc. Estimated Income Statement For the Year Ended December 31, 2018 Cost of goods sold 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? % 3. Determine the break-even sales in units units 4. Construct a cost-volume-profit chart on your own paper. What is the break-even sales in dollars? 5. Determine the operating leverage. Round your answer to one decimal place.

Answer 1

Part 1
	A Company
	Estimated Income Statement
	For the Year ended December 31
		10360 units
	Sales			$      18,64,800
	Cost of goods sold:
	Direct Materials		$        2,69,360
	Direct labor		$        1,76,120
	Factory Overhead		$        5,94,980
	Total Cost of goods sold			$      10,40,460
	Gross Profit			$        8,24,340
	Expenses:
	Selling expenses:
	Sales salaries and commissions		$        1,57,860
	Advertising	$         32,400
	Travel	$           7,200
	Miscllaneous selling expenses	$         59,700	$           99,300
	Total selling expenses		$        2,57,160
	Administrative expenses:
	Office and Officers salaries	$         93,500
	Supplies	$         32,220
	Miscllaneous administrative expenses	$         41,860
	Total administrative expenses		$        1,67,580
	Total Expenses			$        4,24,740
	Operating Income			$        3,99,600
Part 2 and 3 and 4	Contribution margin Income statement
	Sales Price per unit	$              180
	Less:Variable cost per unit	$                72
	Contribution margin per unit	$              108
	Contribution margin ratio($108/$180)	60.00%
	Fixed Costs	$      7,19,280
	Break-even sales in units($719,280/$108)	6660	units
	Break-even sales in dollars($719,280/60%)	$    11,98,800
Part 5	Operating leverage =Contribution margin / Operating Income
	Operating leverage =($108*10360) / $399,600
	Operating leverage =$1,118,880 / $399,600 =2.80