Question

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:

1. Estimated Fixed Cost			Estimated Variable Cost (per unit sold)
   Production costs:
   	Direct materials				$28
   	Direct labor				19
   	Factory overhead	$377,400			14
   Selling expenses:
   	Sales salaries and commissions	78,400			6
   	Advertising	26,500
   	Travel	5,900
   	Miscellaneous selling expense	6,500			6
   Administrative expenses:
   	Office and officers' salaries	76,700
   	Supplies	9,400			2
   	Miscellaneous administrative expense	8,880			3
   	Total	$589,680			$78

   It is expected that 11,760 units will be sold at a price of $156 a unit. Maximum sales within the relevant range are 15,000 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

1)	Belmain Co.
	Estimated Income Statement
	For the Year Ended December 31, 20Y7
	Sales		1,834,560	(11,760 x 156 )
	Less: Cost of Goods Sold
	Direct Materials	329,280		(11,760 x 28 )
	Direct Labor	223,440		(11,760 x 19 )
	Factory Overhead	542,040		(377,400 + (11,760 x 14 ) )
	Cost of Goods Sold		1,094,760
	Gross Profit		739,800
	Less: Expenses
	Selling Expenses
	Sales salaries and commissions	148,600		(78,400 + (11,700 x 6) )
	Advertising	26,500
	Travel	5,900
	Miscellaneous selling expenses	76,700		(6,500 + ( 11,700 x 6 )
	Total selling expenses		257,700
	Administrative Expenses
	Office and officers salaries	76,700
	Supplies	32,800		(9,400 + (11,700 x 2 ) )
	Miscellaneous administrative expenses	43,900		(8,800 + ( 11,700 x 3 ) )
	Total administrative expenses		153,400
	Total expenses		411,100
	Income from operations		328,700
2)	Expected contribution margin ratio = 0.50 or 50%
	CM ratio = Contribution margin / Sales
	CM ratio = $78 / $156 = 0.50
	CM = Sales - Variable Cost = $156 - $78 = $ 78
3)	a) Break-even sales in units = 7,560 units
	BES (units) = Fixed cost / Contribution margin per unit
	BES (units) = $589,680/ $78 = 7,560
	b) Break-even sales in dollars = $1,179,360
	BES (dollars) = Fixed cost / Contribution margin ratio
	BES (dollars) = $589,680 / 0.50 = $ 1,179,360
4.)	CVP Chart

	Breakeven sales is $ 1,179,360 .
5)	a) Margin of safety in dollars = $655,200
	MOS (dollars) = Actual sales - Break-even point in units
	MOS (dollars) = $1,834,560 - $1,179,360 = $655,200
	b) Margin of Safety (percentage of sales) = 36%
	MOS (%) = Margin of safety in dollars / Actual sales
	MOS (%) = $655,200 / $1,834,560 = 36%
6)	Operating Leverage = 3 times
	OL = Contriubtion margin / Operating income
	OL = $917,250 / $328,700 = 3