Question

please answer correctly everything that I have not answered. I really need help on 4.

✓ 2.2596 PR 19-6A 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 2016 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) $ 46 40 20 $200,000 8 Production costs: Direct materials. Direct labor Factory overhead. Selling expenses: Sales salaries and commissions. Advertising... Travel ... Miscellaneous selling expense Administrative expenses: Office and officers' salaries Supplies....... Miscellaneous administrative expense Total 110,000 40,000 12,000 7,600 132,000 10,000 13,400 $525,000 4 1 $120 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. Instructions 1. Prepare an estimated income statement for 2016. 2. What is the expected contribution margin ratio? 3. Determine the break-even sales in units and dollars. 4. Construct a cost-volume-profit chart indicating the break-even sales. 5. What is the expected margin of safety in dollars and as a percentage of sales? 6. Determine the operating leverage.

Answer 1

2)

Contribution Margin Ratio

Selling price per unit is $160.

Variable cost per unit given is $120.

Contribution margin ratio = (Selling price per unit - Variable cost per unit) / Selling price per unit

Contribution margin ratio =[( $160-$120) / 120] X 100 = 25%

Expected contribution margin ratio is 25%

Contribution margin is contribution margin per unit divided by sales revenue per unit. Contribution margin per unit is selling price per unit less variable cost per unit. Contribution margin ratio as calculated is 25%. It means each dollar of sales revenue provides $0.25 towards recovery of fixed cost first. Once fixed cost is totally recovered then contribution goes towards profit margin.

3)

Fixed costs given is $525,000.

Break-even point in sales units is calculated below:

Break even point (in units) = Fixed costs / (Selling price per unit - Variable cost per unit)

= $525,000 /( $160-$120) =13,125

Break-even point in units is 13,125

Break-even point in units is fixed costs divided by contribution per unit. Break-even point of 13,125 units mean sales units of 13,125 will recover all fixed and variable costs incurred. Any sale volume above 13,125 will contribute towards profit. If sales fall below 13,125 entity will produce loss.

Fixed costs given is $525,000. Contribution margin ratio calculated in step (2) is 25%. Break-even point in sales dollars then is:

Break-even point in sales dollars = Fixed costs /Contribution margin ratio

= $525,000 / 25% = $2,100,000

Break-even point in sales dollars is $2,100,000

Break-even point in sales is fixed costs divided by contribution margin ratio. Selling price per unit is $160. Unit sales required to achieve break even sales is 13,125. Multiplying break even sales units with selling price per unit will derive the break even sales dollars of $2,100,000.

4)

Following is the Cost Volume Profit chart and the data used in the preparation of chart

$(100 $1,000,000 Break even chart $300,000 $200,000 $100,000 Profit or (loss) Sales (a) (a) X 25% - $525,000 $ 1,000,000 (275,000) $ 1,300,000 (200,000) $ 1,400,000 $ (175,000) $ 1,500,000 $ (150,000) $ 1,600,000 $ (125,000) $ 1,700,000 $ (100.000) $ 1,800,000 $ (75,000) $ 1,900,000 $ (50,000) $ 2.000.000 $ (25.000) $ 2,100,000S $ 2,200,000 $ 25,000 S 2,300,000 $ 50,000 $ 2,400,000 $ 75,000 $ 2,500,000 $ 100,000 $ 2,600,000 $ 125,000 $ 2,700,000 $ 150,000 S 2,800,000 $ 175,000 $ 2,900,000 $ 200,000 S 3,000,000 $ 225,000 $1,600,000 $1.700.000 $1.800.000 $2,600,000 $2,700,000 $2,400,000 $2,500,000 $1,300,000 $1,400,000 $1,500,000 $1,900,000 $2,000,000 $2,100,000 $2,200,000 $2,300,000 $2,800,000 $2,900,000 $3,000,000 5/200,000) S[300,000)

Break even sales in dollars using above chart is $2,100,000

Sales are taken in X-axis and profit or (loss) is taken in Y-axis. At sales level of $2,100,000 break even chart curve touching X-axis. Sales above that level produces profit and below that level produces loss.

5)

Break even sales dollars calculated in step (4) is $2,100,000.

Actual sales is $3,500,000.

Margin of safety then is: Margin of safety = Actual sales - Break even sales

= $3,500,000 - $2,100,000 = $1,400,000

Margin of Safety in Sales Dollars is $1,400,000

Margin of safety is actual sales less break even sales. provides the sales in excess of break-even sales.Here, Margin of Safety is $1,400,000. Each margin sales dollar produces profit at a rate of $0.25 per each excess sales dollar because contribution margin is 25%.

Margin of safety as a percent of sales is:

(Actual sales - Break even sales) / Actual sales

[($3,500,000 - $2,100,000) / $3,500,000] X 100 = 40%

Margin of Safety as a percent of sales is 40%

Margin of sales percent is margin sales divided by actual sales. Margin of sales as a percent of sales represent percent of sales that are producing profit. Forty percent of each sales dollar is contributing towards profit at a rate of 25 cents per each sales dollar.

6)

Operating leverage = Contribution margin / Operating income

= Sales dollars X contribution margin ratio / Operating income

= $3,500,000 X 25% / $350,000 = 2.5

Operating Leverage is 2.5

Operating leverage of 2.5 means for every 1% change in sales will change operating income by 2.5%. Change in operating income is more than change in sales percent because of high degree of operating leverage.

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