Question

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:

Question not attempted.

1		Estimated Fixed Cost	Estimated Variable Cost (per unit sold)
2	Production costs:
3	Direct materials	—	$46.00
4	Direct labor	—	40.00
5	Factory overhead	$200,000.00	20.00
6	Selling expenses:
7	Sales salaries and commissions	110,000.00	8.00
8	Advertising	40,000.00	—
9	Travel	12,000.00	—
10	Miscellaneous selling expense	7,600.00	1.00
11	Administrative expenses:
12	Office and officers’ salaries	132,000.00	—
13	Supplies	10,000.00	4.00
14	Miscellaneous administrative expense	13,400.00	1.00
15	Total	$525,000.00	$120.00

It is expected that 21,875 units will be sold at a price of $160 a unit. Maximum sales within the relevant range

The range of activity over which changes in cost are of interest to management.

are 27,000 units.

	Required:
A.	Prepare an estimated income statement for 2016. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries.
B.	What is the expected contribution margin ratio The percentage of each sales dollar that is available to cover the fixed costs and provide an operating income. ?
C.	Determine the break-even sales in units and dollars.
D.	Construct a cost-volume-profit chart on your own paper. What is the break-even sales?
E.	What is the expected margin of safety in dollars and as a percentage of sales?
F.	Determine the operating leverage. Round to one decimal place.

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Labels and Amount Descriptions

Labels In CengageNOW, a Label is a text entry that does not have an amount associated with it. and Amount Descriptions In CengageNOW, an Amount Description is a text entry other than an Account that has an amount associated with it.
Advertising
Contribution margin
Cost of goods sold
Direct labor
Direct materials
Expenses
Factory overhead
Gross profit
Income from operations
Manufacturing margin
Miscellaneous administrative expense
Miscellaneous selling expense
Office and officers’ salaries
Sales
Sales salaries and commissions
Supplies
Total administrative expenses
Total expenses
Total selling expenses
Travel
Variable cost of goods sold

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Income Statement

A. Prepare an estimated income statement for 2016. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries.

Question not attempted.

Wolsey Industries Inc.

Estimated Income Statement

For the Year Ended December 31, 2016

1
2
3
4
5
6
7
8
9	Selling expenses:
10
11
12
13
14
15	Administrative expenses:
16
17
18
19
20	Total expenses
21

Solution

Wolsey Industries Inc.

Estimated Income Statement

For the Year Ended December 31, 2016

1
2
3
4
5
6
7
8
9	Selling expenses:
10
11
12
13
14
15	Administrative expenses:
16
17
18
19
20	Total expenses
21

Points:

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Explanation

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Additional Questions

B. What is the expected contribution margin ratio

The percentage of each sales dollar that is available to cover the fixed costs and provide an operating income.

?

Points:

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Explanation

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

Units	units
Dollars	selector 1 $2,100,000 $3,000,000 $1,200,000 $1,400,000

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Explanation

D. Construct a cost-volume-profit chart on your own paper. What is the break-even sales?

selector 1

$1,200,000

$3,000,000

$1,400,000

$2,100,000

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Final Questions

E. What is the expected margin of safety in dollars and as a percentage of sales?

Dollars	$
Percentage

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Explanation

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

Points:

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Explanation

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Answer 1

Concepts and reason

Marginal costing: Concept of marginal costing requires that variable costs are charged to inventory and period costs are charged to income statement. In traditional accounting fixed manufacturing overhead is charged to inventory but not directly to income statement. But in variable costing all fixed costs are charged to income statement.

Variable costs: Variable costs are costs that change with every additional unit produced. They are variable based on volume of production but fixed per each unit produced.

Fixed costs: Fixed costs are costs that do not change because of change in number of units produced. They are fixed for a given level of output. For example rent of factory building does not change whether there is actual production or not. And fixed costs are fixed for a given range of output. For example additional factory may be required if there is required expansion.

Fundamentals

Contribution margin ratio: Contribution margin is sales revenue in excess of variable costs. Contribution margin is calculated using below formula:

Break even sales: Break even sales are the sales at which business earns no profit or sustains any loss. Simply it is $0 net income. It is calculated using below formula:

Margin of safety: Margin of safety are the sales in excess of break-even sales. Contribution from margin sales contributes toward profit. It is calculated using below formula:

Operating leverage: Operating leverage provides change in net income because of change in sales of the entity. Higher operating leverage arises due to higher fixed costs. Lower operating leverage arises due to lower fixed costs. It is calculated using below formula:

(A)

Income statement of the corporation is provided below:

Thus, income from operations is

(B)

Selling price per unit is $160. Variable cost per unit given is $120. Contribution margin ratio then is:

Thus, contribution margin ratio is

(C)

Fixed costs given is $525,000. Break-even point in sales units is calculated below:

Thus, break-even point in units is

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

Thus, break-even point in sales dollars is

(D)

Below is the cost volume profit chart and the data used in the preparation of chart:

Break even sales in dollars using above chart is

(E)

Break even sales dollars calculated in step (4) is $2,100,000. Actual sales is $3,500,000. Margin of safety then is:

Thus, margin of safety in sales dollars is

Margin of safety as a percent of sales is:

Thus, margin of safety as a percent of sales is

Operating leverage is:

Thus, operating leverage is

Ans: Part A

Income statement of the corporation is provided below:

Part B

Expected contribution margin ratio is 25%.

Part C.1

Break-even point in units is 13,125.

Part C.2

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

Part D

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

Part E.1

Margin of safety in sales dollars is $1,400,000.

Part E.2

Margin of safety as a percent of sales is 40%.

Part F

Operating leverage is 2.5