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 20Y7 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 $13 Direct labor 9 Factory overhead $453,400 6 Selling expenses: Sales salaries and commissions 94,200 3 Advertising 31,900 Travel 7,100 Miscellaneous selling expense 7,800 3 Administrative expenses: Office and officers' salaries 92,100 Supplies 11,300 1 Miscellaneous administrative expense 10,680 1 Total $708,480 $36 It is expected that 9,020 units will be sold at a price of $180 a unit. Maximum sales within the relevant range are 11,000 units. Required: 1. Prepare an estimated income statement for 20Y7. Belmain Co. Estimated Income Statement For the Year Ended December 31, 20Y7

Belmain Co.
Estimated Income Statement
For the Year Ended December 31, 20Y7
Sales			$
Cost of goods sold:
Direct materials		$
Direct labor
Factory overhead
Cost of goods sold
Gross profit			$
Expenses:
Selling expenses:
Sales salaries and commissions	$
Advertising
Travel
Miscellaneous selling expense
Total selling expenses		$
Administrative expenses:
Office and officers' salaries	$
Supplies
Miscellaneous administrative expense
Total administrative expenses
Total expenses
Income from operations			$

Feedback

1. Use the absorption costing format.

2. What is the expected contribution margin ratio? Round to the nearest whole percent.
%

3. Determine the break-even sales in units and dollars.

Units	units
Dollars	units

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?

Dollars:	$
Percentage: (Round to the nearest whole percent.)		%

6. Determine the operating leverage. Round to one decimal place.

Answer 1

Requirement-1: Belmain Co Estimated Income Statement For the Year Ended December 31, 20Y7 $1,623,600 [9,020 units x $180] Sales Cost of goods sold Direct materials Direct labor Factory overhead Cost of goods sold $117,260 $81,180 $507,520 [9,020 units x $13] [9,020 units x $9] [$453,400(9,020 x $6)] $705.960 $917,640 Gross profit Expenses Selling expenses: $121,260 $31,900 $7,100 $34,860 [$94,200 (9,020 x $3)] Sales salaries and commissions Advertising Travel Miscellaneous selling expense Total selling expenses [$7,800+ (9,020 x $3)] $195,120 Administrative expenses $92,100 $20,320 Office and officers' salaries Supplies Miscellaneous administrative expense$19,700 Total administrative expenses [$11,300 (9,020 x $1)] [$10,680(9,020 x $1)] $132,120 Total expenses Income from operations $327,240 $590,400

Requirement-2: Selling price per unit Less: Variable cost per unit Contribution margin per unit $180 S36 $144 Contribution margin ratio 80% [$ 144/ $180 Requirement-3 Break-even sales in units Fixed costs & expenses / contribution margin per unit Fixed costs & expenses Contribution margin per unit Break-even sales in units $708,480 $144 4,920 [As calculated in Requirement-2] I$708,480/$144] Break-even sales in dollars Fixed costs & expenses/ Contribution margin ratio Fixed costs & expenses Contribution margin ratio Break-even sales in dollars $708,480 80% $885,600 [As calculated in Requirement-2] [$708,480 / 80%)

Requirement-4: Cost-Volume-Profit Chart Units x $180 Sales $ (a) Fixed Cost (b) Units x $36 (a)(b Sales T.Cost $1,200,000 $1,000,000 $800,000 $600,000 $400,000 O $200,000 50 $200,000 $400,000 600,000 800,000 Units Variable Cost $0 Total Cost $708,480 $708,480 $744,480- $780,480 $816,480-$276,480 $852,480 -$132,480 $888,480$11,520 $924,480 $155,520 Profit Break-even Sales $ $0$708,480 1,000 $180,000 $708,480 2,000 $360,000 $708,480 0 $564,480 -$420,480 $36,000 $72,000 480$108,000 480$144,000 5,000 $900,000 $708,480 $180,000 480$216,000 Sales S 3,000 $540,000 $708, 4,000 $720,000 $708, Total Cost Profit 6, 8,000 Break-even Sales units 6,000 $1,080,000 $708, Units sold Requirement-5: Total Sales Less: Break-even sales in dollars Margin of safety sales, in dollars Margin of safety sales, in % $1,623,600 [9,020 units x $180] -$885,600 [As calculated in Requirement-3] $738,000 45% MOS in dollars / Total sales = $738,000 / $1,623,600 = 45%)

Degree of Operating Leverage Contribution margin/ Income from operations $1,298,880 [9,020 units x $144 (as calculated in Requirement-2)] Contribution margin Income from operations$590,400 Degree of Operating Leverage [As calculated in Requirement-1] 2.2[S1,298,880 $590,400]