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:

		Estimated Fixed Cost			Estimated Variable Cost (per unit sold)
Production costs:
	Direct materials	—			$46
	Direct labor	—			40
	Factory overhead	$200,000			20
Selling expenses:
	Sales salaries and commissions	110,000			8
	Advertising	40,000			—
	Travel	12,000			—
	Miscellaneous selling expense	7,600			1
Administrative expenses:
	Office and officers' salaries	132,000			—
	Supplies	10,000			4
	Miscellaneous administrative expense	13,400			1
Total		$525,000			$120

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:

1. Prepare an estimated income statement for 20Y3.

Wolsey Industries Inc.
Estimated Income Statement
For the Year Ended December 31, 20Y3
			$
Cost of goods sold:
		$
Total cost of goods sold
Gross profit			$
Expenses:
Selling expenses:
	$
Total selling expenses		$
Administrative expenses:
	$
Total administrative expenses
Total expenses
Operating income			$

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. If required, round your answer to one decimal place, e.g. 15.4.

Answer 1

Q1. According to the question we need to prepare first estimated Income statement for 20Y3. For that first we need to know what is Income statement.

Income statement:- It is an important financial statement which states the profit or Income earned in a particular period by the company. It shows the earnings before Interest and Tax, Net Income,etc.

Wolsey Industries Inc.expected Income statement for the year ending 20Y3
	($)	Amount ($)
Sales (21,875 units* $160)		35,00,000
Less: Cost of Goods sold:
Direct materials (21,875 units* $46)	1,006,250
Direct labour (21,875 units* $40)	875,000
Factory overhead( wn.1)	637,500
Total cost of goods sold-		(2,518,750)
Gross margin- ( Sales- COGS)		981,250
Less: Operating Expenses:
Selling Expenses- (i) Sales salaries and commissions (wn.2)	285,000
(ii)Advertising	40,000
(iii)Travel	12,000
(iv)Miscellaneous selling expense	29475
Administrative expenses:(i)Office and officers' salaries	132,000
(ii)Supplies (wn.3)	97,500
(iii)Miscellaneous administrative expense	35,275
Total operating expenses-		(631,250)
Operating Income (Gross margin- Operating expenses)		350,000

Working Notes:

1. Factory overhead- Estimated Fixed overhead + Variable overhead

= $200,000+ 21875 units* $20 per unit= $637,500

2.Sales salaries and commissions expense= Estimated Fixed overhead + Variable overhead

=$110,000+ 21875 units * $8 per unit= $ 285000

3.Supplies expense- Estimated Fixed overhead + Variable overhead

=$10,000+ 21875 units *$ 4 per unit= $97500

Q2. We have to calculate the Contribution margin ratio by using formula= Contribution margin per unit/ Sales per unit

Contribution margin per unit is calculated by using formula= Sales price per unit- Variable cost per unit

Selling price per unit	$160
less: Variable cost per unit	($120)
Contribution margin per unit=	$40

Contribution margin ratio= $40/ $160*100= 25%

Q3. Next, we need to calculate the Break even sales in both Units and Dollars.

1. Break even point in units is calculated by using formula= Fixed cost/ Contribution margin per unit

=$ 525,000/ $40= 13125 units

2. Break even point in Dollars is calculated by using the formula= Fixed cost/ Contribution margin ratio

= $525,000/ 25%= $21,00,000

Q4. The break even sales will be $21,00,000.