   Chapter 21, Problem 21.6APR

Chapter
Section
Textbook Problem

Contribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverageWolsey 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 $160 a unit. Maximum sales within the relevant range are 27,000 units.Instructions 1. Prepare an estimated income statement for 20Y8. 2. What is the expected contribution margin ratio? 3. Determine the break-even sales in units and dollars. 4. Construct a cost-volume-profit chart indicating the break-even sales. 5. What is the expected margin of safety in dollars and as a percentage of sales? 6. Determine the operating leverage. 1. To determine Cost-Volume-Profit Analysis: It is a method followed to analyze the relationship between the sales, costs, and the related profit or loss at various levels of units sold. In other words, it shows the effect of the changes in the cost and the sales volume on the operating income of the company. To prepare: an estimated income statement for 20Y8. Explanation Prepare an estimated income statement for 20Y8.  W Incorporation Estimated Income Statement For the year ended December 31, 20Y8 Particulars Amount ($) Amount ($) Amount ($) Sales (1) 3,500,000 Less: Cost of Goods sold: Direct Materials (2) 1,006,250 Direct Labor (3) 875,000 Factory Overhead (4) 637,500 Cost of Goods Sold (2,518,750) Gross Profit 981,250 Less: Expenses: Selling expenses: Sales salaries and commissions (5) 285,000 Advertising 40,000 Travel 12,000 Miscellaneous selling expense (6) 29,475 Total selling expenses 366,475 Administrative expenses: Office and Officers’ salaries 132,000 Supplies (7) 97,500 Miscellaneous administrative expenses (8) 35,275 Total administrative expenses 264,775 Total expenses (631,250) Income from operations 350,000

Table (1)

Working notes:

Determine sales.

Number of units to be sold =21,875 units

Selling price per unit =$160 per unit Sales =(Numberofunitstobesold)×(Sellingpriceperunit)=21,875units×$160perunit=$3,500,000 (1) Determine the cost of direct materials. Number of units to be sold =21,875 units Direct Materials cost per unit =$46 per unit

DirectMaterials =(Numberofunitstobesold)×(DirectMaterialscostperunit)=21,875units×$46perunit=$1,006,250 (2)

Determine the cost of direct labor.

Number of units to be sold =21,875 units

Direct labor cost per unit =$40 per unit DirectLabor =(Numberofunitstobesold)×(DirectLaborcostperunit)=21,875units×$40perunit=$875,000 (3) Determine the cost of factory overhead. Factory overhead-Fixed =$200,000

Number of units to be sold =21,875 units

Factory overhead-Variable cost per unit =$20 per unit Factoryoverhead =[Factoryoverhead-Fixedcost]+[(Numberofunitstobesold)×(Factoryoverhead-Variablecostperunit)]=$200,000+[21,875units×$20perunit]=$200,000+$437,500=$637,500 (4)

Determine the sales salaries and commissions

2.

To determine
the expected contribution margin ratio.

3.

To determine
the break-even sales in units and dollars.

4.

To determine

To construct: a cost-volume-profit chart indicating the break-even sales.

5.

To determine
the expected margin of safety in dollars and as a percentage of sales.

6.

To determine
the operating leverage.

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Find more solutions based on key concepts 