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				$24
	Direct labor				16
	Factory overhead	$207,800			12
Selling expenses:
	Sales salaries and commissions	43,200			5
	Advertising	14,600
	Travel	3,200
	Miscellaneous selling expense	3,600			4
Administrative expenses:
	Office and officers' salaries	42,200
	Supplies	5,200			2
	Miscellaneous administrative expense	4,920			3
	Total	$324,720			$66

It is expected that 9,020 units will be sold at a price of $132 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
			$
Cost of goods sold:
		$
Total cost of goods sold
Gross profit			$
Expenses:
Selling expenses:
	$
Total selling expenses		$
Administrative expenses:
	$
Total administrative expenses
Total expenses
Income from operations			$

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

Part 1
	Belmain Co.
	Estimated Income Statement
	For the Year ended December 31,2017
	Sales			$             1,190,640
	Cost of goods sold:
	Direct Material	$                     216,480
	Direct Labor	$                     144,320
	Factory Overhead	$                     316,040
	Total Cost of goods sold		$               676,840
	Gross Profit			$                513,800
	Expenses:
	Selling expenses:
	Sales Salaries and commissions	$                       88,300
	Advertising	$                       14,600
	Travel	$                         3,200
	Miscellaneous selling expenses	$                       39,680
	Total Selling expenses		$               145,780
	Administrative expenses:
	Office and officer's Salaries	$                       42,200
	Supplies	$                       23,240
	Miscellaneous administrative expenses	$                       31,980
	Total Administrative expenses		$                 97,420
	Total expenses		$               243,200
	Income from Operations			$                270,600
Part 2	Contribution Margin Ratio =($595,320 / $1,190,640)*100 =50%
Part 3	Break-even point(in units) =$324,720 / ($132-$24-$16-$12-$5-$4-$2-$3) =4,920 units
	Break-even point(in dollars) =$324,720 / 0.50 =$649,440
Part 4
	Contribution Margin Income Statement
	Sales			$             1,190,640
	Variable Costs:
	Cost of goods sold	$                     469,040
	Selling expenses	$                       81,180
	Administrative expenses	$                       45,100
	Total Variable Costs		$               595,320
	Contribution Margin			$                595,320
	Fixed Costs:
	Cost of goods sold	$                     207,800
	Selling expenses	$                       64,600
	Administrative expenses	$                       52,320
	Total Fixed Costs		$               324,720
	Net Income			$                270,600
	Break-even Sales is $1,704,960
Part 5	Margin of Safety(in dollars) =$1,190,640 - $ 649,440=$541,200
	Margin of Safety( as % of sales) =($541,200 / $1,190,640)*100 =45.45%
Part 6	Operating Leverage = Contribution margin / Net income
	Operating Leverage =$595,320 / $270,600 =2.2