Wolsey Industries Inc. expects to maintain the same inventories at the end of 20
ID: 2427422 • Letter: W
Question
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
—
$56.00
4
Direct labor
—
34.00
5
Factory overhead
$198,000.00
20.00
6
Selling expenses:
7
Sales salaries and commissions
107,000.00
10.00
8
Advertising
35,000.00
—
9
Travel
10,000.00
—
10
Miscellaneous selling expense
8,000.00
1.00
11
Administrative expenses:
12
Office and officers’ salaries
161,200.00
—
13
Supplies
9,000.00
6.00
14
Miscellaneous administrative expense
13,000.00
1.00
15
Total
$541,200.00
$128.00
It is expected that 22,550 units will be sold at a price of $160 a unit. Maximum sales within the relevant range are 27,350 units.
Determine the operating leverage. Round to one decimal place.
1
Estimated Fixed Cost
Estimated Variable Cost (per unit sold)
2
Production costs:
3
Direct materials
—
$56.00
4
Direct labor
—
34.00
5
Factory overhead
$198,000.00
20.00
6
Selling expenses:
7
Sales salaries and commissions
107,000.00
10.00
8
Advertising
35,000.00
—
9
Travel
10,000.00
—
10
Miscellaneous selling expense
8,000.00
1.00
11
Administrative expenses:
12
Office and officers’ salaries
161,200.00
—
13
Supplies
9,000.00
6.00
14
Miscellaneous administrative expense
13,000.00
1.00
15
Total
$541,200.00
$128.00
Explanation / Answer
Wolsey Industries A Estimated Income Statement for 2016 Units produced and sold 22,550.00 Deails Amt $/unit Total Amt $ Sales Revenue 160.00 3,608,000.00 Less Variable cost of goods Sold Direct Materials 56.00 1,262,800.00 Direct Labor 34.00 766,700.00 Factory Overhead 20.00 451,000.00 Total Cost Of Goods Sold 110.00 2,480,500.00 Variable sales salaries & commission 10.00 225,500.00 Variable Misc Selling Expenses 1.00 22,550.00 Variable supplies 6.00 135,300.00 Variable Misc Admin Expenses 1.00 22,550.00 Total Variable cost of sales 128.00 2,886,400.00 Contribution Margin 32.00 721,600.00 Fixed Costs Factory Overhead 198,000.00 Sales salaries & Commissions 107,000.00 Advertising 35,000.00 Travel 10,000.00 Misc Selling expenses 8,000.00 Office & Officer's salary 161,200.00 Supplies 9,000.00 Misc Admin expenses 13,000.00 Total Fixed cost 541,200.00 Net Operating Income 180,400.00 B Expected CM ratio=32/160= 20.00% C Total Fixed cost 541,200.00 CM per unit 32.00 Break even units=Fixed cost/unit contribution 16,913 Break even sales=16913*160= $ 2,706,000 E Expected sales = 3,608,000.00 BE sales 2,706,000.00 Margin of safety= $ 902,000.00 Margin of safety% 25.0% F Operating leverage=Contribution/Net Operating Income= 4.00
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