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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Contribution margin, break-even sales, cost-volume-profit graph, and operating leverage

Organic Health Care Products Inc. expects to maintain the same inventories at the end of 20Y8 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 20Y8. A summary report of these estimates is as follows:


It is expected that 400.000 units will be sold at a price of $25 a unit. Maximum sales within the relevant range are 500.000 units.

Instructions
Prepare an estimated income statement for 20Y8.

To determine

Concept Introduction:

Cost Volume Profit (CVP) Analysis:

The Cost Volume Profit analysis is the analysis of the relation between cost, volume, and profit of a product. It analyzes the cost and profits at the different level of production, in order to determine the breakeven point and required the level of sales to earn the desired profit.

Contribution margin means the margin that is left with the company after recovering variable cost out of revenue earned by selling smart phones. The formula for contribution margin is as follows:

Contribution margin = Sales - Variable cost.

Similarly contribution margin ratio = Contribution/sales

To Prepare:

The Estimated Income Statement

Explanation

The Estimated Income Statement is prepared as follows:

    Estimated Income Statement
    For the Year 20Y8
    Sales Revenue (400000 units @ $25) $ 10,000,000
    Production Costs:
    Direct Material (400000 units @ $8) $ 3,200,000
    Direct labor (400000 units @ $3) $ 1,200,000
    Factory overhead (400000 units @ $1.5)+200000 $ 800,000 $ 5,200,000
    Selling expenses:
    Advertising $ 1,450,000
    Sales Salaries and Commissions (400000 units @ $1.85)+93000 $ 833,000
    Travel $ 340,000
    Misc...

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