PR $20-6$A Contribution Margin, Break$-$Even Sales, Cost$-$Volume$-$Profit Chart, Margin of Safety, and Operating Leverage

Obj. $2,3,4,5$ Wolsey Industries Inc. expects to maintain the same inventories at the end of $20$ Y $3$ 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:

$\backslash$table$[[,\backslash$table$[[$Estimated$],[$Fixed Cost$]],\backslash$table$[[$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

Prepare an estimated income statement for $20$ Y $3.$

What is the expected contribution margin ratio?

Answer

Check Figure: $25\%$

$3.$ 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.