# Contribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverage Belmain Co. expects to maintain the same inventories at the end of 20Y7 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 — $50.00 Direct labor — 30.00 Factory overhead$ 350,000 6.00 Selling expenses: Sales salaries and commissions 340,000 4.00 Advertising 116,000 — Travel 4,000 — Miscellaneous selling expense 2,300 1.00 Administrative expenses: Office and officers’ salaries 325,000 — Supplies 6,000 4.00 Miscellaneous administrative expense 8,700 1.00 Total $1,152,000$96.00 It is expected that 12,000 units will be sold at a price of $240 a unit. Maximum sales within the relevant range are 18,000 units. Instructions 1. Prepare an estimated income statement for 20Y7. 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 21.6BPR Textbook Problem ## Contribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverageBelmain Co. expects to maintain the same inventories at the end of 20Y7 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 —$50.00 Direct labor — 30.00 Factory overhead $350,000 6.00 Selling expenses: Sales salaries and commissions 340,000 4.00 Advertising 116,000 — Travel 4,000 — Miscellaneous selling expense 2,300 1.00 Administrative expenses: Office and officers’ salaries 325,000 — Supplies 6,000 4.00 Miscellaneous administrative expense 8,700 1.00 Total$1,152,000 $96.00 It is expected that 12,000 units will be sold at a price of$240 a unit. Maximum sales within the relevant range are 18,000 units.Instructions 1. Prepare an estimated income statement for 20Y7. 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.

Expert Solution

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 20Y7

### Explanation of Solution

Prepare an estimated income statement for 20Y7.

 Company B Estimated Income Statement For the year ended December 31, 20Y8 Particulars Amount ($) Amount ($) Amount ($) Sales (1) 2,880,000 Less: Cost of Goods sold: Direct Materials (2) 600,000 Direct Labor (3) 360,000 Factory Overhead (4) 422,000 Cost of Goods Sold (1,382,000) Gross Profit 1,498,000 Less: Expenses: Selling expenses: Sales salaries and commissions (5) 388,000 Advertising 116,000 Travel 4,000 Miscellaneous selling expense (6) 14,300 Total selling expenses 522,300 Administrative expenses: Office and Officers’ salaries 325,000 Supplies (7) 54,000 Miscellaneous administrative expenses (8) 20,700 Total administrative expenses 399,700 Total expenses (922,000) Income from operations 576,000 Table (1) Working notes: Determine sales. Number of units to be sold =12,000 units Selling price per unit =$240 per unit

Sales =(Numberofunitstobesold)×(Sellingpriceperunit)=12,000units×$240perunit=$2,880,000 (1)

Determine the cost of direct materials.

Number of units to be sold =12,000 units

Direct Materials cost per unit =$50 per unit DirectMaterials =(Numberofunitstobesold)×(DirectMaterialscostperunit)=12,000units×$50perunit=$600,000 (2) Determine the cost of direct labor. Number of units to be sold =12,000 units Direct labor cost per unit =$30 per unit

DirectLabor =(Numberofunitstobesold)×(DirectLaborcostperunit)=12,000units×$30perunit=$360,000 (3)

Determine the cost of factory overhead.

Factory overhead-Fixed =$350,000 Number of units to be sold =12,000 units Factory overhead-Variable cost per unit =$6 per unit

Factoryoverhead =[Factoryoverhead-Fixedcost]+[(Numberofunitstobesold)×(Factoryoverhead-Variablecostperunit)]=$350,000+[12,000units×$6perunit]=$350,000+$72,000=\$422,000 (4)

Determine the sales salaries and commissions

Expert Solution

2.

To determine
the expected contribution margin ratio.

Expert Solution

3.

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

Expert Solution

4.

To determine

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

Expert Solution

5.

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

Expert Solution

6.

To determine
the operating leverage.

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