Question

Wolsey Industries Inc. expects to maintain the same inventories at the end of 20Y3 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:

1		Estimated Fixed Cost	Estimated Variable Cost (per unit sold)
2	Production costs:
3	Direct materials	—	$58.00
4	Direct labor	—	32.00
5	Factory overhead	$192,000.00	20.00
6	Selling expenses:
7	Sales salaries and commissions	109,000.00	6.00
8	Advertising	41,000.00	—
9	Travel	11,000.00	—
10	Miscellaneous selling expense	7,200.00	1.00
11	Administrative expenses:
12	Office and officers’ salaries	126,800.00	—
13	Supplies	12,000.00	2.00
14	Miscellaneous administrative expense	14,600.00	1.00
15	Total	$513,600.00	$120.00

It is expected that 21,400 units will be sold at a price of $160 a unit. Maximum sales within the relevant range are 26,325 units.

	Required:
1.	Prepare an estimated income statement for 20Y3. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries. Enter all amounts as positive values.
2.	What is the expected contribution margin ratio?
3.	Determine the break-even sales in units and dollars. Round your answers to the nearest whole number.
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? Round your answers to the nearest whole number.
6.	Determine the operating leverage. Round to one decimal place.

Answer 1

		Wolsey Industries Inc.
		Expected Income Statement
		For the year ended 20Y3
	Sales(21400*$160)=(A)			$ 34,24,000.00
1)	Cost of goods sold
	Direct Material(21600*$58)		$     12,41,200.00
	Direct Labor(21400*$32)		$       6,84,800.00
	Factory overhead($192000+(21400*$20))		$       6,20,000.00
	Cost of goods sold=(B)			$ 25,46,000.00
	Gross Profit=(C )=(A)-(B)			$    8,78,000.00
	Expenses
	Selling Expenses
	Sales salaries and commission(109000+21400*$6)	$                                     2,37,400.00
	Advertising	$                                        41,000.00
	Travel	$                                        11,000.00
	Miscellaneous selling expense($7200+21400*$1)	$                                        28,600.00
	Total selling expense		$       3,18,000.00
	Administrative Expense
	Office and Officer's salaries	$                                     1,26,800.00
	Supplies($12000+21400*$2)	$                                        54,800.00
	Miscellaneous administrative expense($14600+21400*$1)	$                                        36,000.00
	Total administrative expense		$       2,17,600.00
	Total Expenses=(D )			$    5,35,600.00
	Income from operation=(C )-(D )			$    3,42,400.00
		Calculation of Expenses
		Fixed	Variable	Total
	Factory Overhead	$                                     1,92,000.00	$       4,28,000.00	$    6,20,000.00
	Sales Salaries & Commission	$                                     1,09,000.00	$       1,28,400.00	$    2,37,400.00
	Miscellaneous Selling Expense	$                                           7,200.00	$           21,400.00	$       28,600.00
	Supplies	$                                        12,000.00	$           42,800.00	$       54,800.00
	Miscellaneous administrative expense($14600+21400*$1)	$                                        14,600.00	$           21,400.00	$       36,000.00
2)	Contribution Margin Ratio=Contribution Margin per unit/sales per unit
	Contribution Margin=Sales price per unit-Variable cost per unit
	Selling Expenses per unit=(A)	$                                              160.00
	Variable Expenses per unit=(B)	$                                             -120.00
	Contribution Margin per unit=(C )	$                                                 40.00
	Contribution margin ratio=(C )/(A)	25%
3)	Break even point in units=Fixed Cost/Contribution margin per unit
	Fixed Cost=(A)	$                                     5,13,600.00
	Contribution margin per unit=(B)	$                                                 40.00
	Break even point in units=(A)/(B)	12840
	Break even points in Dollars=Fixed Cost/Contribution margin ratio
	Fixed Cost=(A)	$                                     5,13,600.00
	Contribution Margin Ratio=(B)	25%
	Break even point in dollars=(A)/(B)	$                                  20,54,400.00
5)	Margin of Safety=(Actual sales-Break even sales)/Actual sales
	Actual Sales=(A)	$                                  34,24,000.00
	Break even sales=(B)	$                                  20,54,400.00
	Margin of safety=(C )=(A)-(B)	$                                  13,69,600.00
	Margin of safety =(C )/(A)	40%
6)	Operating Leverage=Contribution Margin/Operating Income
	Contribution Margin=(Unit sold* contribution margin per unit)=(21400*$40)=(A)	$                                     8,56,000.00
	Operating Income=(B )	$                                     3,42,400.00
	Operating Leverage=(A)/(B)	2.5