Question

Wolsey Industries Inc. expects to maintain the same inventories at the end of 20Y3 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:

1		Estimated Fixed Cost	Estimated Variable Cost (per unit sold)
2	Production costs:
3	Direct materials	—	$56.00
4	Direct labor	—	34.00
5	Factory overhead	$188,000.00	20.00
6	Selling expenses:
7	Sales salaries and commissions	102,000.00	6.00
8	Advertising	39,000.00	—
9	Travel	12,000.00	—
10	Miscellaneous selling expense	7,400.00	1.00
11	Administrative expenses:
12	Office and officers’ salaries	141,200.00	—
13	Supplies	8,000.00	2.00
14	Miscellaneous administrative expense	13,600.00	1.00
15	Total	$511,200.00	$120.00

It is expected that 21,300 units will be sold at a price of $160 a unit. Maximum sales within the relevant range are 25,825 units.

2. What is the expected contribution margin ratio?

3. Determine the break-even sales in units and dollars. Round your answers to the nearest whole number.

Units	units
Dollars	$

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? If applicable, use amounts previously computed and then round your answers to the nearest whole number.

Dollars	$
Percentage

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

Answer 1

		Per unit
1	Sales price	160
Less	Variable cost	120
	Contribution margin	40
	Contribution margin ratio = 40/160	0.25
2	Fixed cost	511200
	Contribution margin per unit	40
	Break even sales in units	12780	Units
	(Fixed cost / Contribution margin per unit)
3	Fixed cost	511200
	Contribution margin ratio	0.25
	Break even sales in Dollars	2044800	Dollars
	(Fixed cost / Contribution margin ratio)
4	Margin of safety in units = (actual sales - breakeven sales)/actual price per unit
	Actual sales	3408000	(21300*160)
	Breakeven sales	2044800
	Margin of safety in dollars	1363200
	Margin of safety in percentage	40%	(1363200/3408000)
5	Operating leverage = Contribution margin / net operating income
	Contribution margin	852000	(21300*40)
	Net operating income	340800	(852000-511200)
	Operating leverage	2.5