Wolsey Industries Inc. expects to maintain the same inventories at the end of 20

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:

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 2016.

What is the expected contribution margin ratio?

Answer

Check Figure: 25%

Determine the break-even sales in units and dollars.

Construct a cost-volume-profit chart indicating the break-even sales.

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

Determine the operating leverage.

Explanation / Answer

Income statement sales 21875*160 3500000 cost of goods sold Direct material 21875*46 1006250 direct labor 21875*40 875000 Factory overhead 200000+21875*20 637500 2518750 gross income 981250 selling expenses salaries and commision 110000+21875*8 285000 advertising 40000 travel 12000 miscellenous 7600+21875*1 29475 -366475 Administrative expenses office salaries 132000 supplies 10000+21875*4 97500 miscellenous 13400+21875*1 35275 -264775 NET INCOME 350000 EXPECTED CONTRIBUTION MARGIN RATIO CONTRIBUTION MARGIN SALES-VARIABLE COST 3500000-(1006250+875000+(21875*20)+(21875*8)+ (21875*1)+(21875*4)+(21875*1)) 875000 CONTRIBUTION MARGIN RATIO CONTRIBUTION MARGIN/SALES 875000/3500000 0.25 BREAK EVEN SALES IN UNITS FIXED COST/CONTRIBUTION PER UNIT 200000+110000+40000+12000+7600+132000+10000+13400/54 13125 CONTRIBUTION PER UNIT 875000/21875 40 BREAK EVEN SALES IN DOLLAR TOTAL FIXED COST/CONTRIBUTION MARGIN RATIO 525000/.25 2100000 MARGIN OF SAFETY EXPECTED SALES-BREAK EVEN SALES 3500000-2100000 1400000 AS A PERCENTAGE OF SALES (1400000/3500000)*100 40 OPERATING LEVERAGE CONTRIBUTION MARGIN/NET SALES 875000/350000 2.5

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