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