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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  $17   Direct labor  12   Factory overhead$626,700  9  Selling expenses:      Sales salaries and commissions130,200  4   Advertising44,100      Travel9,800      Miscellaneous selling expense10,800  3  Administrative expenses:      Office and officers' salaries127,300      Supplies15,700  1   Miscellaneous administrative expense14,600  2   Total$979,200  $48  
It is expected that 10,200 units will be sold at a price of $192 a unit. Maximum sales within the relevant range are 13,000 units

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

Answer 1

Estimated income statement

sale (10200 * $192) =1958400

less: cost of goods sold

Direct materials(10200*$17) =173400

Direct labor(10200*$12) = 122400

  Factory overhead(10200*$9+626700) = 718500  

Gross profit = 944100

Expense:

selling expense

Sales salaries and commissions[130,200*10200*$4) =171000

Advertising = 44100

   Travel = 9,800

Miscellaneous selling expense[10,800* 10200*$3] = 41400

Total selling expense = 266300

Administrative expenses:

  Office and officers' salaries = 127,300

Supplies[15,700+10200*$1] = 25900

Miscellaneous administrative expense[14,600+ 10200*$2] = 35000

Total Administrative expenses = 188200

Income from operations = $489600

operating leverage = Contribution margin / Operating income

= 1468800 / $489600

= 3

Note:- Contribution margin= sales - variable cost

   =1958400 - [$48 * 10200 units]

= 1958400 - 489600

= 1468800