Operating Leverage Wolsey Industries Inc. expects to maintain the same inventories at the end of 20Y3 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 — $46 Direct labor — 40 Factory overhead $200,000 20 Selling expenses: Sales salaries and commissions 110,000 8 Advertising 40,000 — Travel 12,000 — Miscellaneous selling expense 7,600 1 Administrative expenses: Office and officers' salaries 132,000 — Supplies 10,000 4 Miscellaneous administrative expense 13,400 1 Total $525,000 $120 It is expected that 21,875 units will be sold at a price of $160 a unit. Maximum sales within the relevant range are 27,000 units. Required: Prepare an estimated income statement for 20Y3. Wolsey Industries Inc. Estimated Income Statement For the Year Ended December 31, 20Y3 $ Cost of goods sold: Total cost of goods sold Gross profit $ Expenses: Selling expenses: $ Total selling expenses $ Administrative expenses: $ Total administrative expenses Total expenses Operating income $ What is the expected contribution margin ratio? % Determine the break-even sales in units and dollars. Units units Dollars Construct a cost-volume-profit chart on your own paper. What is the break-even sales? What is the expected margin of safety in dollars and as a percentage of sales? Dollars $ Percentage (If required, round the percent to one decimal place, e.g. 15.4%.) % Determine the operating leverage. If required, round your answer to one decimal place, e.g. 15.4.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Operating Leverage
Wolsey Industries Inc. expects to maintain the same inventories at the end of 20Y3 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 |
Estimated Variable Cost |
||||||
|
Production costs: |
|||||||
|
Direct materials |
— |
$46 |
|||||
|
Direct labor |
— |
40 |
|||||
|
Factory overhead |
$200,000 |
20 |
|||||
|
Selling expenses: |
|||||||
|
Sales salaries and commissions |
110,000 |
8 |
|||||
|
Advertising |
40,000 |
— |
|||||
|
Travel |
12,000 |
— |
|||||
|
Miscellaneous selling expense |
7,600 |
1 |
|||||
|
Administrative expenses: |
|||||||
|
Office and officers' salaries |
132,000 |
— |
|||||
|
Supplies |
10,000 |
4 |
|||||
|
Miscellaneous administrative expense |
13,400 |
1 |
|||||
|
Total |
$525,000 |
$120 |
It is expected that 21,875 units will be sold at a price of $160 a unit. Maximum sales within the relevant range are 27,000 units.
Required:
Prepare an estimated income statement for 20Y3.
|
Wolsey Industries Inc. |
|||
|
Estimated Income Statement |
|||
|
For the Year Ended December 31, 20Y3 |
|||
|
|
$ |
||
|
Cost of goods sold: |
|||
|
|
|||
|
|
|||
|
|
|||
|
Total cost of goods sold |
|||
|
Gross profit |
$ |
||
|
Expenses: |
|||
|
Selling expenses: |
|||
|
|
$ |
||
|
|
|||
|
|
|||
|
|
|||
|
Total selling expenses |
$ |
||
|
Administrative expenses: |
|||
|
|
$ |
||
|
|
|||
|
|
|||
|
Total administrative expenses |
|||
|
Total expenses |
|||
|
Operating income |
$ |
What is the expected contribution margin ratio? %
Determine the break-even sales in units and dollars.
|
Units |
units |
|
Dollars |
|
Construct a cost-volume-profit chart on your own paper. What is the break-even sales?
What is the expected margin of safety in dollars and as a percentage of sales?
|
Dollars |
$ |
|
|
Percentage (If required, round the percent to one decimal place, e.g. 15.4%.) |
% |
Determine the operating leverage. If required, round your answer to one decimal place, e.g. 15.4.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
