Question

PR 20-6A Contribution margin, break-even sales, cost-volume-profit chart, Obj. 2,3,4,5 margin of safety, and operating leverage 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: Estimated Estimated Variable Cost Fixed Cost (per unit sold) Production costs: Direct materials.......... Direct labor ........ Factory overhead.......... $200,000 Selling expenses: Sales salaries and commissions. 110,000 Advertising 40,000 Travel .... 12,000 Miscellaneous selling expense ........ 7,600 Administrative expenses: Office and officers' salaries .......... ... 132,000 Supplies.... .. .......... . 10,000 Miscellaneous administrative expense........ 13,400 Total....... $525,000 It is expected that 21,875 units will be sold at a price of $160 a unit. Maximum sales within the relevant range are 27,000 units. (Continued)

Answer 1

Wolsey Industries Inc.
Estimated Income Statement
For the Year Ended December 31, 2016
Sales (21,875 units x $160)			$3,500,000
Cost of goods sold:
Direct materials (21,875 units x $46.00)		$1,006,250
Direct labor(21,875 units x 40.00)		$875,000
Factory overhead ($200,000.00 + (21,875 x 20.00)		$637,500
Cost of goods sold:			$2,518,750
Gross Profit			$981,250
Expenses
Selling expenses:
Sales salaries and commissions 110,000 + 21,875 units x 8.00	$285,000
Advertising	$40,000
Travel	$12,000
Miscellaneous selling expenses (7600 + 21,875 x $1)	$29,475
Total selling expenses		$366,475
Administrative expenses:
Office and officers’ salaries	$132,000
Supplies 10,000 + (21,875 units x 4.00 )	$97,500
Miscellaneous administrative expense $13,400 + 21,875 units x 1)	$35,275
Total administrative expenses		$264,775
Total expenses			$631,250
Income from operations			$350,000
b)
Contribution Margin Ratio = (Sales - Variable Costs/sales)
Contribution Margin Ratio = $3,500,000 - (21875 units x $120)/$3,500,000	25.00%
c)
Break-Even Sales (units) = Fixed costs /Unit Contribution Margin
Break-Even Sales (units) = $525,000/($160-$120)	13125	units
Break-Even Sales (dollars) = Fixed costs /Contribution margin Ratio
Break-Even Sales (dollars) =$525,000/25%	$2,100,000
Break-Even Sales (dollars) =13,125 units x $160	$2,100,000
d) Cost profit volume analysis
Units	Sales	Fixed Cost	Total Cost	Profit
0	$0	$525,000	$525,000	-$525,000
1,000	$160,000	$525,000	$645,000	-$485,000
2,000	$320,000	$525,000	$765,000	-$445,000
3,000	$480,000	$525,000	$885,000	-$405,000
4,000	$640,000	$525,000	$1,005,000	-$365,000
5,000	$800,000	$525,000	$1,125,000	-$325,000
6,000	$960,000	$525,000	$1,245,000	-$285,000
7,000	$1,120,000	$525,000	$1,365,000	-$245,000
8,000	$1,280,000	$525,000	$1,485,000	-$205,000
9,000	$1,440,000	$525,000	$1,605,000	-$165,000
10,000	$1,600,000	$525,000	$1,725,000	-$125,000
11,000	$1,760,000	$525,000	$1,845,000	-$85,000
12,000	$1,920,000	$525,000	$1,965,000	-$45,000
13,000	$2,080,000	$525,000	$2,085,000	-$5,000
14,000	$2,240,000	$525,000	$2,205,000	$35,000
15,000	$2,400,000	$525,000	$2,325,000	$75,000
16,000	$2,560,000	$525,000	$2,445,000	$115,000
17,000	$2,720,000	$525,000	$2,565,000	$155,000
18,000	$2,880,000	$525,000	$2,685,000	$195,000
19,000	$3,040,000	$525,000	$2,805,000	$235,000
20,000	$3,200,000	$525,000	$2,925,000	$275,000
e)
Margin of safety = Actual sales - BEP sales = ($3500000 - $2100000)/3500000	40.00%
Margin of safety = (Actual sales - BEP sales)/Seling price per unit = ($3500000 - $2100000)/160	8,750.00	units
f) Operating leverage = Contribution margin/ operating income =
Operating Leverage = $40 x 21875 /$350,000	2.5

Cost profit volume analysis $2.52M $2.31M $2.1M $1.89M $1.68M $1.47M $1.26M $1.05M $840K $630K $420K $210K - Sales - Fixed Cost - Total Cost - Profit -$210K Units