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	—	$50.00
4	Direct labor	—	32.00
5	Factory overhead	$190,000.00	20.00
6	Selling expenses:
7	Sales salaries and commissions	101,000.00	12.00
8	Advertising	36,000.00	—
9	Travel	14,000.00	—
10	Miscellaneous selling expense	7,600.00	1.00
11	Administrative expenses:
12	Office and officers’ salaries	137,000.00	—
13	Supplies	11,000.00	4.00
14	Miscellaneous administrative expense	14,600.00	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 26,175 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 the year 20Y3
	$	$
Sales		3,408,000
Less Variable Expenses		2,556,000
Contribution Margin		852,000
Less: Fixed Costs
Fixed Factory Overhead	190,000
Sales Salaries and Commissions	101,000
Advertising	36,000
Travel	14,000
Miscellaneous Selling	7,600
Officers' Salaries	137,000
Supplies Expense	11,000
Miscellaneous Administrative Expense	14,600	511,200
Net Operating Income		$ 340,800

2. Expected contribution margin ratio = $ 852,000 / $ 3,408,000 * 100 = 25 %

3. Break-even sales units = Total Fixed Cost / Unit Contribution Margin = $ 511,200 / $ 40 = 12,780 units

Break-even sales dollars = Total Fixed Cost / Contribution Margin Ratio = $ 511,200 / 0.25 = $ 2,044,800

5. Expexted margin of safety in dollars = $ 3,408,000 - $ 2,044,800 = $ 1,363,200

Expected margin of safety percentage = $ 1,363,200 / $ 3,408,000 * 100 = 40 %.

6.Operating Leverage = Contribution Margin / Net Operating Income = $ 852,000 / $ 340,800 = 2.5 times