Question

Wolsey Industries Inc. expects to maintain the same inventories at the end of 20Y8 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	—	$46.00
4	Direct labor	—	40.00
5	Factory overhead	$188,000.00	20.00
6	Selling expenses:
7	Sales salaries and commissions	103,000.00	8.00
8	Advertising	39,000.00	—
9	Travel	14,000.00	—
10	Miscellaneous selling expense	8,000.00	1.00
11	Administrative expenses:
12	Office and officers’ salaries	133,200.00	—
13	Supplies	11,000.00	4.00
14	Miscellaneous administrative expense	15,000.00	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 26,100 units.

	Required:
A.	Prepare an estimated income statement for 20Y8. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries. Be sure to complete the statement heading.
B.	What is the expected contribution margin ratio?
C.	Determine the break-even sales in units and dollars. Round your answers to the nearest whole number.
D.	Construct a cost-volume-profit chart on your own paper. What is the break-even sales?
E.	What is the expected margin of safety in dollars and as a percentage of sales? Round your answers to the nearest whole number.
F.	Determine the operating leverage. Round to one decimal place.

Answer 1

Ans A.                                                              Income Statement for the year of 2018

Sales (21300X160)    = 3408000              

Direct Material(21300X46)                                =(979800)

Direct Labour(21300X40)                                 = (852000)

Factory overhead

Fixed overhead                                                  = (188000)

Variable overhead (20X21300)                      = (426000)

Selling Expenses

Salaried and commission                             

Fixed                                                                   = (103000)

Variable(21300X8)                                           = (170400)

Avdertising                                                         = (39000)

Travel                                                                  = (14000)

Miscellaneous Selling exp

Fixed                                                                   = (8000)

Variable (21300X1)    = (21300)                               

Admn Exp.                                                        

office and officers salaries                            = (133200)

Supplies                                                            = (11000)

Variable supplies (21300X4)                         = (85200)

Miscellanoues admn exp                               = (15000)

Variable miscellanous exp (21300x1)         = (21300)

Net profit for the year                                       = 340800

B). Contribution margin Ratio = (SP-VC)/SPX100

                                                       = (160-120)/160X100 = 25%

C). Calculation of Break Even point = Fixed cost/Contribution margin

                                                                  = 511200/.25 = 2044800

   BEP in units = 2044800/160 = 12780 units

D). Break even sales:- BEP Sales where no profit and no loss situation is exist or where Sales is equal to Variable cost and fixed cost. alternatively beyond BEP profit sales will start.

E). Margin of safety means Total Sales -Break even sales

Total sales value at current level is = 3408000

BEP Sales                                           = 2044800

Margin of safety                                  = 1363200

Margin of safety in % = (1363200/3408000)X100 = 40%

F). Calculation Operating Leverage = (Sales-Variable cost)/ (Sales -VC-FC)

                                                                 = (160-120)X21300/ (40X21300 -511200) = 2.5