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Contribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverage Wolsey Industries 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 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. Instructions 1. Prepare an estimated income statement for 20Y8. 2. What is the expected contribution margin ratio? 3. Determine the break-even sales in units and dollars. 4. Construct a cost-volume-profit chart indicating 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.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 21, Problem 21.6APR
Textbook Problem

Contribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverage

Wolsey Industries 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 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.

Instructions

  1. 1. Prepare an estimated income statement for 20Y8.
  2. 2. What is the expected contribution margin ratio?
  3. 3. Determine the break-even sales in units and dollars.
  4. 4. Construct a cost-volume-profit chart indicating the break-even sales.
  5. 5. What is the expected margin of safety in dollars and as a percentage of sales?
  6. 6. Determine the operating leverage.

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Chapter 21 Solutions

Accounting
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