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 2017 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 $1.199,900 Factory overhead Selling expenses Sales salaries and commissions Advertising 249.400 84,400 18.700 20,600 Travel Miscellaneous selling expense Administrative expenses Office and officers' salaries Supplies Miscellaneous administrative expense Total 243.700 30,000 28,180 $1.874,880 unit. Maximum sales within the relevant range are 11.000 units It is expected that 1.680 units will be sold at a price of $420

Answer 1

income statement

sales (8,680 * 420)		3,645,600
cost of goods sold :
material (30 * 8680 )	260,400
labor (20 *8680 )	173,600
fixed overhead	1,199,900
variable o/h (15*8680)	130,200
cost of goods sold		1,764,100
gross margin		1,881,500
selling expenses
fixed ;
sales salary and commission	249,400
advertising	84,400
travel	18,700
miscellaneous	20,600
variable ;
sales salary and commission (7 * 8680)	60,760
miscellaneous (6*8680)	52,080
total selling expenses		485,940
administrative expenses
fixed ;
office and officer salary	243,700
suppliers	30,000
miscellaneous administrative expenses	28,180
variable ;
suppliers ( 8680 * 3 )	26,040
miscellaneous administrative expenses ( 8680 * 3 )	26040
total administrative expenses		353,960
operating income		1,041,600

2) contribution margin ratio ( 80% )

contribution / selling price

contribution means ( selling price - variable cost )

total variable cost = 84 (given the question )

selling price = 420

contribution = 420 - 84 = 336

contribution margin ratio = (336 / 420 ) * 100 = 80%

3) break even point in unit = fixed cost / contribution

fixed cost = 1,874,880 ( given the question )

break even point in unit = 1,874,880 / 336

  break even point in unit = 5580

break even point in dollar = fixed cost / contribution margin ratio

1,874,880 / 80% = $2,343,600

4) margin of safety percentage

formula = current sales level - break even point / current sales level * 100

= ( 8680 - 5580 / 8680 )100

= 36%

margin of safety dollar = current sales - break even sales

current sales = 3,645,600

break even sales = 2,343,600

= $1,302,000