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 Costs Estimated Variable Cost (per unit sold)
Production costs:
Direct materials………………………………………………………………. -- $50.00
Direct labor…………………………………………………………………….. -- 30
Factory overhead……………………………………………………………. $350,000 6
Selling expenses:
Sales salaries and commissions………………………………………. 340,000 4
Advertising……………………………………………………………… ……… 116,000 --
Travel…………………………………………………………………………… … 4,000 --
Miscellaneous selling expense………………………………………… 2,300 1
Administrative expenses:
Office and officers’ salaries…………………………………………….. 325,000 --
Supplies……………………………………………………………………… ….. 6,000 4
Miscellaneous administrative expense 8,700 1
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.

Required:

a. Prepare an estimated income statement for 2017.
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 indicating 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.

Part a

Belmain Co.

Estimated Income statement for the year ended 2017.

Sales ($240 x 12,000)                                                               $2,880,000

Less Variable Costs :

Direct Materials ($50.00 x 12,000)                                           ($600,000)

Direct Labor ($30.00 x 12,000)                                                 ($360,000)

Factory Overheads ($6.00 x 12,000)                                          ($72,000)

Sales Salaries and Commissions ( $4.00 x 12,000)                  ($48,000)

Miscellaneous selling expenses ( $1.00 x 12,000)                     ($12,000)

Supplies ($4.00 x 12,000)                                                           ($48,000)

Miscellaneous administrative expenses ($1.00 x 12,000)         ($12,000)

Contribution                                                                               $1,728,000

Less Fixed Expenses :

Factory overhead                                                                     ($350,000)

Sales salaries and commissions                                             ($340,000)

Advertising                                                                                 ($116,000)

Travel                                                                                            ($4,000)

Miscellaneous selling expense                                                   ($2,300)

Office and officers’ salaries                                                    ($325,000)

Supplies                                                                                        ($6,000)

Miscellaneous administrative expense                                      ($8,700)

Net Income ( Loss)                                                                     $576,000

Part b

0.6 or 60 %

Part c

Break-even sales (units) = 8,000

Break-even sales (dollars) = $1,920,000

Part d

See attachment

Part e

Margin of safety in dollars  =    $960,000

Margin of safety in percentage  =  33.3 %

Part f

Operating Leverage = 3.00

Explanation:

Income Statement :

Sales - Expenses = Income

Note : I have separated Variable and Fixed Expenses

Contribution Margin ratio :

Contribution Margin ratio = Contribution ÷ Sales

                                          =  $1,728,000  ÷  $2,880,000

                                          = 0.6 or 60 %

Break-even sales ( units and dollars) :

Break-even sales (units) = Fixed Costs ÷ Contribution per unit

                                        = $1,152,000 ÷ $144.00

                                        = 8,000

Break-even sales (dollars) = Fixed Costs ÷ Contribution margin ratio

                                            = $1,152,000 ÷ 0.60

                                            = $1,920,000

Margin of safety in dollars and as a percentage of sales :

Margin of safety in dollars  = Expected Sales (dollars) - Break-even sales (dollars)

                                             =  $2,880,000 - $1,920,000

                                             =   $960,000

Margin of safety in %       = (Expected Sales  - Break-even sales ) ÷ Expected Sales

                                             = $960,000 ÷ $2,880,000

                                             = 33.3 %

Operating leverage

Operating Leverage = Contribution ÷ Earnings Before Interest and Tax

                                  =  $1,728,000 ÷ $576,000

                                  = 3.00

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