Question

PR 19-6A Contribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverage Blythe Industries Inc. expects to maintain the same inventories at the end of 2012 as at the beginning of the year. The total of all production costs for the year is therefore as- sumed 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 2012. A summary report of these estimates is as follows: Estimated Fixed Cost Estimated Variable Cost (per unit sold) aterals.............. $340,000 Production costs: Direct materials... Direct labor Factory overhead............................ Selling expenses: Sales salaries and commissions.............. Advertising.......... Travel .. Miscellaneous selling expense ............ Administrative expenses Office and officers' salaries ............ Supplies............................. Miscellaneous administrative expense........ Total .. 80,000 32,000 8,000 7,600 120,000 8,000 4,400 $600,000 It is expected that 8,000 units will be sold at a price of $200 a unit. Maximum sales within the relevant range are 9,000 units. Instructions 1. Prepare an estimated income statement for 2012 2. What is the expected contribution margin ratio? 3. Determine the break-even sales in units and dollars.

Answer 1

SOLUTION

1. Estimated income statement

Particulars	Amount ($)	Amount ($)	Amount ($)
Sales (8,000*$200)			1,600,000
Cost of goods sold:
Direct materials (8,000*$30)		240,000
Direct labor (8,000*$20)		160,000
Factory overhead [340,000 + (8,000*$11)]		428,000
Cost of goods sold			828,000
Gross Profit			772,000
Expenses-
Selling expenses:
Sales salaries and commissions [80,000 + (8,000*$5)]	120,000
Advertising	32,000
Travel	8,000
Miscellaneous selling expenses [7,600 + (8,000*$5)]	47,600
Total selling expenses		207,600
Administrative expenses:
Office and officers’ salaries	120,000
Supplies  [8,000 + (8,000*$2)]	24,000
Miscellaneous administrative expense [4,400 + (8,000*$2)]	20,400
Total administrative expenses		164,400
Total expenses			372,000
Income from operations			400,000

2. Contribution Margin Ratio = (Sales - Variable Costs) / Sales

= (1,600,000 - 600,000) / 1,600,000

= 62.50%

Variable Costs = 8,000 * $75 = 600,000

3. Break even point in units =  Fixed costs / Unit Contribution Margin

= 600,000 / (200 - 75)

= 600,000 / 125 = 4,800 units

Break-Even Sales (dollars) = Fixed costs /Contribution margin Ratio

= 600,000 / 62.50% = 960,000