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:

		Estimated Fixed Cost			Estimated Variable Cost (per unit sold)
Production costs:
	Direct materials				$28
	Direct labor				19
	Factory overhead	$698,900			14
Selling expenses:
	Sales salaries and commissions	145,200			6
	Advertising	49,100
	Travel	10,900
	Miscellaneous selling expense	12,000			6
Administrative expenses:
	Office and officers' salaries	142,000
	Supplies	17,500			2
	Miscellaneous administrative expense	16,400			3
	Total	$1,092,000			$78

It is expected that 7,000 units will be sold at a price of $390 a unit. Maximum sales within the relevant range are 9,000 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.

Balmain Co. Estimated Income Statement For the year ended December 31, 20Y7
Sales			$ 2,730,000
Cost of Goods Sold
Direct Materials	196,000
Direct Labor	133,000
Variable Factory Overhead	98,000
Fixed Factory Overhead	698,900		1,125,900
Gross Profit			1,604,100
Selling Expenses
Sales Salaries and Commissions	187,200
Advertising	49,100
Travel	10,900
Miscellaneous Selling Expenses	54,000
Total Selling Expenses		301,200
Administrative Expenses
Office and Officer's Salaries	142,000
Supplies	31,500
Miscellaneous Administrative Expenses	37,400
Total Administrative Expenses		210,900
Total Expenses			512,100
Income from Operations			$ 1,092,000

2. Expected contribution margin ratio = $ ( 390 - 78 ) / $ 390 * 100 = 80 %

3.

Break-even sales in units	3,500 units
Break-even sales in dollars	$ 1,365,000

5.

Margin of Safety Dollars	$ 1,365,000
Margin of Safety %	50 %

6. Degree of Operating leverage = Contribution Margin / Income from Operations = $ 2,184,000 / $ 1,092,000 = 2