Question

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				$22
	Direct labor				14
	Factory overhead	$127,900			11
Selling expenses:
	Sales salaries and commissions	26,600			5
	Advertising	9,000
	Travel	2,000
	Miscellaneous selling expense	2,200			4
Administrative expenses:
	Office and officers' salaries	26,000
	Supplies	3,200			2
	Miscellaneous administrative expense	2,900			2
	Total	$199,800			$60

It is expected that 5,920 units will be sold at a price of $150 a unit. Maximum sales within the relevant range are 7,000 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 Company
Estimated Income Statement
For the year ended 31st December 2017
Particulars	Computation	Amount ($)	Amount ($)	Amount ($)
Sales	5920 units * $150			888000
Cost of Goods Sold :-
Direct Materials	5920 units *$22	130240
Direct Labor	5920 units *$14	82880
Factory Overhead	(5920 units *$11) + $127900	193020
Total Cost of Goods Sold			406140
Selling Expenses :-
Sales Salaries and Commissions	(5920 units *$5) + $26600	56200
Advertising		9000
Travel		2000
Miscellaneous selling expense	(5920 units *$4) + $2200	25880
Total Selling Expenses			93080
Administrative Expenses :-
Office and officer's Salaries		26000
Supplies	(5920 units *$2) + $3200	15040
Miscellaneous administrative Expense	(5920 units *$2) + $2900	14740
Total Administrative Expenses			55780
Total Expenses				555000
Income from Operations				333000

2). Contribution Margin Ratio :-

Total Variable Cost = Sales Units * Total Variable Cost per Unit

= 5920 * $60

= $355200

Contribution Margin Ratio = (Sales - Variable Cost)/ Sales * 100

= ($888000 - $355200)/ $888000 * 100

= $532800 / $888000 * 100

= 60%

3. Break even sales in units and dollars:

Total Fixed Cost = $199800

Break even Point in Dollars = Fixed Cost / Contribution Margin Ratio

= $199800 / 0.60

= $333000

Contribution Per Unit = Sales Price per unit - Variable Cost per unit

= $150- $60

= $90

Break Even Point In Units = Fixed Cost / Contribution Per Unit

= $199800 / $90

= 2220 units

4. Break even sales is $333000

5. Margin of safety :

Margin of safety in dollars = Actual sales - Break even Sales

= $888000 - $333000

=$555000

Margin of safety as a % of sales = (Actual sales - Break even Sales) / Actual sales

= $555000 / $888000

=62.5%

6. Operating leverage:

Operatin leverage = Contribution / Income from operations

= $532800 / $333000

=1.6