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 — $66.00 4 Direct labor — 32.00 5 Factory overhead $190,000.00 20.00 6 Selling expenses: 7 Sales salaries and commissions 102,000.00 6.00 8 Advertising 37,000.00 — 9 Travel 10,000.00 — 10 Miscellaneous selling expense 7,800.00 1.00 11 Administrative expenses: 12 Office and officers’ salaries 138,400.00 — 13 Supplies 12,000.00 2.00 14 Miscellaneous administrative expense 14,000.00 1.00 15 Total $511,200.00 $128.00 It is expected that 21,300 units will be sold at a price of $160 a unit. Maximum sales within the relevant range are 25,900 units. Required: 1. Prepare an estimated income statement for 20Y3. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries. Enter all amounts as positive values. 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. 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? Round your answers to the nearest whole number. 6. Determine the operating leverage. Round to one decimal place.

Answer 1

1.

Wolsey Industries Inc. Estimated Income Statement For 20Y3
Sales			$ 3,408,000
Less: Cost of Goods Sold
Direct Material	$ 1,405,800
Direct Labor	681,600
Factory Overhead	616,000		2,703,400
Gross Profit			704,600
Expenses
Selling Expenses
Sales Salaries and Commissions	229,800
Advertising	37,000
Travel	10,000
Miscellaneous Selling Expense	29,100
Total Selling Expenses		$ 305,900
Administrative Expenses
Office and Officer's Salaries	138,400
Supplies	54,600
Miscellaneous Administrative Expense	35,300
Total Administrative Expenses		228,300
Total Expenses			534,200
Income from Operations			$ 170,400

2. Contribution Margin Ratio:

Sales	$ 3,408,000
Less: Variable Costs	2,726,400
Contribution Margin	681,600
Contribution Margin Ratio ( Contribution Margin / Sales * 100)	20 %

3. Break-even sales in units = Total Fixed Cost / Contribution Margin per Unit = $ 511,200 / $ 32 = 15,975 units.

Break-even sales dollars = Total Fixed Cost / Contribution Margin Ratio = $ 511,200 / 0.20 = $ 2,556,000

5. Margin of safety in dollars = Actual Sales - Break-even Sales = $ 3,408,000 - $ 2,556,000 = $ 852,000

Margin of Safety Percentage = $ 852,000 / $ 3,408,000 * 100 = 25 %.

6. Operating Leverage = Contribution Margin / Income from Operations = $ 681,600 / $ 170,400 = 4