Question

In: Accounting

Wolsey Industries Inc. expects to maintain the same inventories at the end of 2016 as at...

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:

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.

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?
C. Determine the break-even sales in units and dollars. Round your answers to the nearest whole number.
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? Round your answers to the nearest whole number.
F. Determine the operating leverage. Round to one decimal place.

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.

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

Additional Questions

B. What is the expected contribution margin ratio?

C. Determine the break-even sales in units and dollars. Start by using the contribution margin ratio (part B.) and then round your answers to the nearest whole number.

Units units
Dollars $

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

$

Final Questions

E. 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

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

Solutions

Expert Solution

income statement for the year ended december 31 2016
Particulars Amount Amount
Sale revenue(21300*160) 3408000
less: cost of goods sold
Direct material (21300*56) 1192800
direct labour (21300*34) 724200
factory overhead (21300*20)+188000 614000
total 2531000 2531000
gross profit 877000
less: selling & adm expenses
sales salaries & commission 229800
advertising 39000
travel 12000
miscellaneous selling expeses 28700
total selling expenses 309500
administrative exp
office & officer salaries 141200
supplies 50600
miscellaneous adm exp 34900
total administrative exp 226700
total selling & adm exp 536200
income from operation (GP-Total selling & adm exp) 340800
B) Contribution margin per unit = selling price - variable cost per unit
contribution margin per unit = 160-120 = 40
contribution margin ratio = contribution margin/selling price
contribution margin ratio = 40/160 = 25%
c) Fixed cost = 511200
breakeven sale unit = fixed cost/contribution margin
breakeven sale unit =511200/40 = 12780
Breakeven sale in dollor = fixedcost/contribution margin ratio
breakeven sale in dollor = 511200/25% = 2044800
E) margin of safety = actual sale - breakeven sale in dollor
margin of safety = 3408000-2044800 = 1363200
margin of safety in % = margin of safety /actual sale
margin of safety in % = 1363200/3408000= 40%
F) contribution margin per unit = 40
contribution margin = 40*21300 = 852000
operating leverage = contribution margin/ income from operation
operating leverage = 852000/340800 = 2.5

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