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	$200,000.00	20.00
6	Selling expenses:
7	Sales salaries and commissions	110,000.00	8.00
8	Advertising	40,000.00	—
9	Travel	12,000.00	—
10	Miscellaneous selling expense	7,600.00	1.00
11	Administrative expenses:
12	Office and officers’ salaries	132,000.00	—
13	Supplies	10,000.00	4.00
14	Miscellaneous administrative expense	13,400.00	1.00
15	Total	$525,000.00	$120.00

It is expected that 21,875 units will be sold at a price of $160 a unit. Maximum sales within the relevant range are 27,000 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.
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?
F.	Determine the operating leverage. Round to one decimal place.

Answer 1

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Part a		a	b	a+(21875*b)
		Estimated Fixed Cost	Estimated Variable Cost	Budgeted Income Statement
	Sale Revenue				$3,500,000
	Less: Variable Cost
	Direct materials		$                                             46	$                             1,006,250
	Direct labor		$                                             40	$                                 875,000
	Factory overhead		$                                             20	$                                 437,500
	Sales salaries and commissions		$                                               8	$                                 175,000
	Miscellaneous selling expense		$                                               1	$                                   21,875
	Supplies		$                                               4	$                                   87,500
	Miscellaneous administrative expense		$                                               1	$                                   21,875
	Total Variable Cost				$2,625,000
	Contribution Margin				$   875,000
	Less: Fixed Cost
	Factory overhead	$                                                                        200,000		$                                 200,000
	Sales salaries and commissions	$                                                                        110,000		$                                 110,000
	Advertising	$                                                                          40,000		$                                   40,000
	Travel	$                                                                          12,000		$                                   12,000
	Miscellaneous selling expense	$                                                                            7,600		$                                     7,600
	Office and officers’ salaries	$                                                                        132,000		$                                 132,000
	Supplies	$                                                                          10,000		$                                   10,000
	Miscellaneous administrative expense	$                                                                          13,400		$                                   13,400
	Total Fixed Cost				$   525,000
	Net Income				$   350,000
Part b	Expected Contribution Margin Ratio	Cont Margin/Sale	875000/3500000	25.00%
Part c	Break Even Sales (Units)	Fixed Cost/CM Per unit	525000/(160-120)	13,125	Units
	Break Even Sales (Dollars)	Fixed Cost/CM Ratio	525000/25%	$                             2,100,000
Part d	Mos	(Current Sale-BEP)/Current Sale	(3500000-2100000)/3500000	40%
Part e	Operating Leavarage	Contribution Margin/Net Operating Income Margin	25%/10%	2.50
		Net operaing Income Margin	350000/3500000