Financial & Managerial Accounting (13th Edition)

Chapter 19, Problem 6PSA

INSTRUCTIONS:

Wolsey Industries Inc. expects to maintain the same inventories at the end of 2016 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:

1		Estimated Fixed Cost	Estimated Variable Cost (per unit sold)
2	Production Costs
3	Direct Materials	-	$46.00
4	Direct Labor	-	40.00
5	Factory Overhead	$200,000.00	20.00
6	Selling Expenses
7	Sales Salaries and Commissions	110,00.00	8.00
8	Advertising	40,000.00	-
9	Travel	12,000.00	-
10	Misc Selling Expenses	7,600.00	1.00
11	Administrative Expenses
12	Offices and officers' salaries	132,00.00	-
13	Supplies	10,000.00	4.00
14	Misc administrative expense	13,400.00	1.00
15	Total	$525,000.00	$120.00

It is expected that 21,875 units will be sold at a price of $160 a unit. Maximum sales within the relevant range

The range of activity over which changes in cost are of interest to management.

are 27,000 units.

	Required:
A.	Prepare an estimated income statement for 2016. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries.
B.	What is the expected contribution margin ratio The percentage of each sales dollar that is available to cover the fixed costs and provide an operating income.?
C.	Determine the break-even sales in units and dollars.
D.	Construct a cost-volume-profit chart on your own paper. What is the break-even sales?
E.	What is the expected margin of safety in dollars and as a percentage of sales?
F.	Determine the operating leverage. Round to one decimal place.

INCOME STATEMENT:

Wolsey Industries Inc. Estimated Income Statement For the Year Ended December 31, 2016
1
2
3
4
5
6
7
8
9	Selling Expenses
10
11
12
13
14
15	Administrative Expenses
16
17
18
19
20	Total Expenses
21

ADDITIONAL QUESTIONS:

B. What is the expected contribution margin ratio?

C. Determine the break-even sales in units and dollars.

D. Construct a cost-volume-profit chart on your own paper. What is the break-even sales?

E. What is the expected margin of safety in dollars and as a percentage of sales?

F. Determine the operating leverage. Round to one decimal place.

LABELS AND AMOUNT DESCRIPTIONS (For Income Statement)
Advertising
Contribution margin
Cost of goods sold
Direct labor
Direct materials
Expenses
Factory overhead
Gross profit
Income from operations
Manufacturing margin
Miscellaneous administrative expense
Miscellaneous selling expense
Office and officers salaries
Sales
Sales salaries and commissions
Supplies
Total administrative expenses
Total expenses
Total selling expenses
Travel
Variable cost of goods sold