Question

Contribution Margin, Break-Even Sales, Cost-Volume-Profit Chart, Margin of Safety, and Operating Leverage

Belmain Co. expects to maintain the same inventories at the end of 20Y7 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:

		Estimated Fixed Cost			Estimated Variable Cost (per unit sold)
Production costs:
	Direct materials				$26
	Direct labor				17
	Factory overhead	$580,600			13
Selling expenses:
	Sales salaries and commissions	120,700			6
	Advertising	40,800
	Travel	9,100
	Miscellaneous selling expense	10,000			5
Administrative expenses:
	Office and officers' salaries	117,900
	Supplies	14,500			2
	Miscellaneous administrative expense	13,600			3
	Total	$907,200			$72

It is expected that 8,400 units will be sold at a price of $288 a unit. Maximum sales within the relevant range are 11,000 units.

Required:

1. Prepare an estimated income statement for 20Y7.

Belmain Co.
Estimated Income Statement
For the Year Ended December 31, 20Y7
			$
Cost of goods sold:
		$
Cost of goods sold
Gross profit			$
Expenses:
Selling expenses:
	$
Total selling expenses		$
Administrative expenses:
	$
Total administrative expenses
Total expenses
Income from operations			$

2. What is the expected contribution margin ratio? Round to the nearest whole percent.
%

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

Units	units
Dollars	units

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?

Dollars:	$
Percentage: (Round to the nearest whole percent.)		%

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

Answer 1

Product	in Amount
Selling price	$    288.00
Less: Variable cost:
Direct Material	$      26.00
Direct Labor	$      17.00
Sales salaries and commissions	$        6.00
Factory Ovehead	$      13.00
Misc.selling expenses	$        5.00
Supplies	$        2.00
Misc.admin expenses	$        3.00
Total Variable Cost	$      72.00
Contribution	$    216.00

2	Contribution Margin ratio	Contribution	($288-$72)	75%
		Sales	$288
3	Break even point in units	Total Fixed cost	$           907,200	4,200
		CM	216.00
	Break even point in dollars	Total Fixed cost	$           907,200	$   1,209,600
		CMR	75%
5	Margin of safety in units	Profit	$           907,200	4,200
		CM	216.00
	Margin of safety in dollars	Profit	$           907,200	$   1,209,600
		CMR	75%
6	Degree of Operating Leverage	Contribution Margin	$        1,814,400	2.00
		Operating Income	$           907,200

4.

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