Question

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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				$26
	Direct labor				17
	Factory overhead	$431,300			13
Selling expenses:
	Sales salaries and commissions	89,600			6
	Advertising	30,300
	Travel	6,700
	Miscellaneous selling expense	7,400			5
Administrative expenses:
	Office and officers' salaries	87,600
	Supplies	10,800			2
	Miscellaneous administrative expense	10,220			3
	Total	$673,920			$72

It is expected that 7,020 units will be sold at a price of $288 a unit. Maximum sales within the relevant range are 9,000 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

Belmain Co.
Estimated Income Statement
For the Year Ended December 31, 20Y7
Sales		2021760
Cost of goods sold:
Direct Materials	182520
Direct Labor	119340
Factory Overhead	522560
Cost of goods sold		824420
Gross profit		1197340
Expenses:
Selling expenses:
Sales salaries and commissions	131720
Advertising	30300
Travel	6700
Misc. Selling Expense	42500
Total selling expenses		211220
Administrative expenses:
Office and officers' salaries	87600
Supplies	24840
Misc. administrative expense	31280
Total administrative expenses		143720
Total expenses		354940
Income from operations		842400

What is the expected contribution margin ratio?

Marginal Costing
		Per Unit
Sales	2021760	288
Less Variable Cost	505440	72
Contribution	1516320	216
Less Fixed Cost	673920
Income from operations	842400

contribution margin ratio =Contribution/Sales=1516320/201760 =75%

Determine the break-even sales in units and dollars

in units =Fixed Cost/Contrbution Per unit

=673920/216=3120 units

in dollars=3120*288=$898560

What is the expected margin of safety in dollars and as a percentage of sales

Margin of Saftey =Actual Sales - Break Even Sales =2021760*898560=1123200

margin of safety as a percentage of sales =Margin of Saftey/Sales=1123200/2021760=56%

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

Contrbution Margin/Net operating Income

=1516320/842400=1.8