Question

Wolsey Industries Inc. expects to maintain the same inventories at the end of 2016 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)
2	Production costs:
3	Direct materials	—	$58.00
4	Direct labor	—	38.00
5	Factory overhead	$194,000.00	20.00
6	Selling expenses:
7	Sales salaries and commissions	102,000.00	8.00
8	Advertising	42,000.00	—
9	Travel	8,000.00	—
10	Miscellaneous selling expense	7,800.00	1.00
11	Administrative expenses:
12	Office and officers’ salaries	135,200.00	—
13	Supplies	10,000.00	2.00
14	Miscellaneous administrative expense	14,600.00	1.00
15	Total	$513,600.00	$128.00

It is expected that 21,400 units will be sold at a price of $160 a unit. Maximum sales within the relevant range are 26,000 units.

	Required:
A.	Prepare an estimated income statement for 2016. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries.
B.	What is the expected contribution margin ratio?
C.	Determine the break-even sales in units and dollars. Round your answers to the nearest whole number.
D.	Construct a cost-volume-profit chart on your own paper. What is the break-even sales?
E.	What is the expected margin of safety in dollars and as a percentage of sales? Round your answers to the nearest whole number.
F.	Determine the operating leverage. Round to one decimal place.

Income Statement

A. Prepare an estimated income statement for 2016. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries.

Wolsey Industries Inc.

Estimated Income Statement

For the Year Ended December 31, 2016

1
2
3
4
5
6
7
8
9	Selling expenses:
10
11
12
13
14
15	Administrative expenses:
16
17
18
19
20	Total expenses
21

Additional Questions

B. What is the expected contribution margin ratio?

C. Determine the break-even sales in units and dollars. Start by using the contribution margin ratio (part B.) and then round your answers to the nearest whole number.

Units	units
Dollars	$

D. Construct a cost-volume-profit chart on your own paper. What is the break-even sales?

$

Final Questions

E. What is the expected margin of safety in dollars and as a percentage of sales? If applicable, use amounts previously computed and then round your answers to the nearest whole number.

Dollars	$
Percentage

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

Labels and Amount Descriptions
Advertising
Contribution margin
Cost of goods sold
Direct labor
Direct materials
Expenses
Factory overhead
Gross profit
Income from operations
Manufacturing margin
Miscellaneous administrative expense
Miscellaneous selling expense
Office and officers’ salaries
Sales
Sales salaries and commissions
Supplies
Total administrative expenses
Total expenses
Total selling expenses
Travel
Variable cost of goods sold

Answer 1

ANSWER A:

ANSWER B:

Selling Price = $160
Variable Cost per unit = $128

Contribution Margin per unit = Selling Price - Variable Cost per unit
Contribution Margin per unit = $160 - $128
Contribution Margin per unit = $32

Contribution Margin Ratio = Contribution Margin per unit / Selling Price
Contribution Margin Ratio = $32 / $160
Contribution Margin Ratio = 20%

ANSWER C:

Fixed Costs = $513,600

Break-even sales in units = Fixed Costs / Contribution Margin per unit
Break-even sales in units = $513,600 / $32
Break-even sales in units = 16,050

Break-even sales in dollar = Fixed Costs / Contribution Margin Ratio
Break-even sales in dollar = $513,600 / 20%
Break-even sales in dollar = $2,568,000

ANSWER E:

Margin of Safety in dollars = Actual Sales - Break-even sales in dollar
Margin of Safety in dollars = $3,424,000 - $2,568,000
Margin of Safety in dollars = $856,000

Margin of Safety in percentage = Margin of Safety in dollars / Actual Sales
Margin of Safety in percentage = $856,000 / $3,424,000
Margin of Safety in percentage = 25%

ANSWER F:

Contribution Margin per unit = $32
Contribution Margin = $32 * 21,400
Contribution Margin = $684,800

Operating Leverage = Contribution Margin / Income from Operations
Operating Leverage = $684,800 / $171,200
Operating Leverage = 4