Contribution Margin, Break-Even Sales, Cost-Volume-Profit Chart, Margin of Safet

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:

It is expected that 7,000 units will be sold at a price of $264 a unit. Maximum sales within the relevant range are 9,000 units.

Required:

1. Prepare an estimated income statement for 20Y7.

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

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

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?

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

Estimated
Fixed Cost Estimated Variable Cost
(per unit sold) Production costs: Direct materials $24 Direct labor 16 Factory overhead $443,500 12 Selling expenses: Sales salaries and commissions 92,200 5 Advertising 31,200 Travel 6,900 Miscellaneous selling expense 7,600 4 Administrative expenses: Office and officers' salaries 90,100 Supplies 11,100 2 Miscellaneous administrative expense 10,400 3 Total $693,000 $66

Explanation / Answer

1 Estimated income statement for 20Y7 Sales $1,848,000 Cost of goods sold: Direct Material $168,000 Direct labor $112,000 Factory overhead $527,500 Total cost of goods sold $807,500 Gross Profit $1,040,500 Expenses: Selling Expenses: Sales Salaries and commissions $127,200 Advertising $31,200 Travel $6,900 Miscellaneous selling expenses $35,600 Total selling expenses $200,900 Administrative expenses: Office and officers' salaries $90,100 Supplies $25,100 Miscellaneous administrative expenses $31,400 Total administrative expenses $146,600 Total expenses $347,500 Income from operations $693,000 2 Contribution Margin Ratio Sales price $264 Variable cost $66 Contribution Margin $198 Contribution Margin Ratio (198/264) 75% 3 Breakeven sales in units and dollars Break even sales in units = Fixed cost/contribution margin per unit = $693000/$198                                                     = 3500 units Breakeven sales in dollars = Fixed costs/Contribution margin ratio = $693000/75%                                                       = $924000 4 Cost volume profit chart 5 Margin of safety Margin of safety =(Estimated sales-breakeven sales)/Estimated sales =(1848000-924000)/1848000                                    =50% Margin of safety in dollars = 1848000-924000                                                        = $924000 6 Operating Leverage Operating Leverage = Contribution Margin/Net operating income (7000*$198)/$693000                                           = $1386000/$693000                                           = 2

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