Question

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 Fixed Cost Estimated Variable Cost (per unit sold) Production costs: Direct materials Direct labor Factory overhead $175,100 Selling expenses: Sales salaries and commissions 36,400 Advertising 12,300 Travel 2,700 Miscellaneous selling expense 3,000 Administrative expenses: Office and officers' salaries 35,600 Supplies 4,400 Miscellaneous administrative expense 4,100 Total $273,600 $48 It is expected that 7,600 units will be sold at a price of $120 a unit. Maximum sales within the relevant range are 10,000 units.

Answer 1

2.	Selling price	$120
	Less: Variable cost per unit	$48
	contribution margin	$72
	contribution margin %	60%	(72/120)
3.	Break even sales
	Units	Fixed cost/ Contribution per unit	273600/72
	Units		3,800
	Dollars	Fixed Cost/ contribution ratio	273600/60%
	Dollars		$456,000
4.	Break even sales =	$456,000
5.	Margin of safety
	Dollars	Current sales - Breakeven sales
		=912,000-456,000
	Dollars	$456,000
	%	50%	(456,000/912,000)*100
6.	Operating leverage = (Contribution margin/Operating income)
	Operating leverage = ((7600*72)/(7600*72-273600))
		547200/273600
	Operating leverage	2

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