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				$50.00
	Direct labor				30.00
	Factory overhead	$350,000			6.00
Selling expenses:
	Sales salaries and commissions	340,000			4.00
	Advertising	116,000
	Travel	4,000
	Miscellaneous selling expense	2,300			1.00
Administrative expenses:
	Office and officers' salaries	325,000
	Supplies	6,000			4.00
	Miscellaneous administrative expense	8,700			1.00
	Total	$1,152,000			$96.00

It is expected that 12,000 units will be sold at a price of $240 a unit. Maximum sales within the relevant range are 18,000 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:
		$
Total 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?
%

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

Units	units
Dollars

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 (If required, round the percent to one decimal place, e.g. 15.4%.)		%

6. Determine the operating leverage.

Answer 1

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Belmain Co.
Compilation of data	Estimated Variable Cost	Estimated Variable Cost	Estimated Fixed Cost	Total cost
	(per unit sold)
Units sold	12,000.00
Sell Price	240.00	2,880,000.00
Production costs:
Direct materials	50.00	600,000.00		600,000.00
Direct labor	30.00	360,000.00		360,000.00
Factory overhead	6.00	72,000.00	350,000.00	422,000.00
Selling expenses:
Sales salaries and commissions	4.00	48,000.00		48,000.00
Advertising			116,000.00	116,000.00
Travel			4,000.00	4,000.00
Miscellaneous selling expense	1.00	12,000.00	2,300.00	14,300.00
Administrative expenses:
Office and officers' salaries			325,000.00	325,000.00
Supplies	4.00	48,000.00	6,000.00	54,000.00
Miscellaneous administrative expense	1.00	12,000.00	8,700.00	20,700.00
Total	96.00	1,152,000.00	812,000.00	1,964,000.00
Answer 1
Estimated Income Statement	Amount $	Amount $
For the Year Ended December 31, 20Y7
Revenue		2,880,000.00	See Compilation of data
Cost of goods sold:
Direct materials	600,000.00		See Compilation of data
Direct labor	360,000.00		See Compilation of data
Factory overhead	422,000.00		See Compilation of data
Total cost of goods sold		1,382,000.00
Gross profit		1,498,000.00
Expenses:
Selling expenses:
Sales salaries and commissions	48,000.00		See Compilation of data
Advertising	116,000.00		See Compilation of data
Travel	4,000.00		See Compilation of data
Miscellaneous selling expense	14,300.00		See Compilation of data
Total selling expenses		182,300.00
Administrative expenses:
Office and officers' salaries	325,000.00		See Compilation of data
Supplies	54,000.00		See Compilation of data
Miscellaneous administrative expense	20,700.00		See Compilation of data
Total administrative expenses		399,700.00
Total expenses		582,000.00
Income from operations		916,000.00
Answer 2	Amount $
Revenue	2,880,000.00		A
Total Variable Cost	1,152,000.00		B
Contribution margin	1,728,000.00		C=A-B
Contribution margin ratio	60.00%		D=C/A
Answer 3
Contribution margin	1,728,000.00		E
Units sold	12,000.00		F
Contribution margin per unit	144.00		G=E/F
Total Fixed Cost	812,000.00		H
Break-even sales in units	5,638.89		I=H/G
Contribution margin ratio	60.00%		See D
Total Fixed Cost	812,000.00		See H
Break-even sales in dollars	1,353,333.33		J=H/D
Answer 5
Revenue	2,880,000.00		See A
Break-even sales in dollars	1,353,333.33		See J
Margin of safety in dollars	1,526,666.67		K=A-J
Margin of safety %	53.01%		L=K/A
Answer 6
Operating leverage is the ratio between contribution and Net Operating income.
Contribution margin	1,728,000.00		See E
Income from operations	916,000.00		See Income statement
Operating leverage	1.89