Question

Cookie Co. expects to maintain the same inventories at the end of 20Y9 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	—			$26
	Direct labor	—			17
	Factory overhead	$110,600			13
Selling expenses:
	Sales salaries and commissions	23,000			6
	Advertising	7,800			—
	Marketing	1,700			—
	Miscellaneous selling expense	1,900			5
Administrative expenses:
	Office and officers' salaries	22,500			—
	Supplies	2,800			2
	Miscellaneous administrative expense	2,500			3
	Total	$172,800			$72

It is expected that 6,400 units will be sold at a price of $144 a unit. Maximum sales within the relevant range are 8,000 units.

1. What is the expected contribution margin ratio? Round to the nearest whole percent.    %

2. Determine the break-even sales in units and dollars.

Units         units

Dollars $

3. What is the expected margin of safety in dollars and as a percentage of sales?

Dollars:    $

Percentage: (Round to the nearest whole percent)   %

4. Determine the operating leverage. Round to one decimal place.

Answer 1

• All working forms part of the answer
• [1]

A	Sale price per unit	$144
B	Variable cost per unit	$72
C = A - B	Contribution margin per unit	$72
D = (C/A) x 100	Contribution margin ratio	50%	Answer [1]

• [2]

A	Total Fixed cost	$172,800
B	Contribution margin per unit	$72
C = A/B	Break even sales in UNITs	2400	Answer [2]
D	Contribution margin ratio	50%
E = A/D	Break even sales in DOLLARS	$345,600	Answer [2]

• [3]

A	Total Sales in units	6400
B	Break even sales in UNITs	2400
C = A - B	Margin of Safety in units	4000
D = C x $ 144	Margin of Safety in dollars	$576,000	Answer [3]
E = (C/A) x 100	Margin of safety in %	63%	Answer [3]

• [4]

A	Contribution margin per unit	$72
B	Units sold	6400
C = A x B	Total Contribution margin	$460,800
D	Total Fixed Cost	$172,800
E = C-D	Operating Income	$288,000
F = (C/E)	Operating Leverage	1.6	Answer [4]