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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
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.

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.

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