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 theiir departments during the year. A summary report of these estimates is as follows Estimated Fixed Cost Estimated Variable Cost (per unit sold) Production costs: 46 40 20 $200,000 Selling expenses: 110,000 40,000 12,000 7,600 8 Travel Miscellaneous selling expense Administrative expenses: 132,000 10,000 13,400 $525,000 4 120 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.

Explanation / Answer

WOLSEY INDUSTRIES INC. Estimated income statement For the year ended December 31,2016 Sales     3,500,000 Cost of goods Sold: Direct materials    1,006,250 Direct Labor       875,000 Factory overhead       637,500 Cost of goods Sold     2,518,750 Gross Profit        981,250 Expenses: Selling Expenses Sales salaries          285,000 Advertising            40,000 Travel            12,000 Misc.selling Epxense            29,475       366,475 Administrative expenses: Office and officers salaries          132,000 Supplies            97,500 Misc. Admin expense            35,275 Total administrative expense       264,775 Total Expenses        631,250 Income from operations        350,000 Contribution Margin ratio Sales     3,500,000 Units Unit variable cost Variable cost 21875 120     2,625,000 Contribution Margin        875,000 Sales     3,500,000 Contribution Margin        875,000 Ratio 875,000/ 3,500,000 0.25 Break even sales Fixed costs        525,000 Sale price - Unit variable cost Unit contribution margin 160 120                   40 Break even sales (Units) (525000/40)           13,125 Sale price                 160 Break even sales (dollars)     2,100,000 Margin of safety Sale price Units Expected sales 160 21875     3,500,000 Break even point 160 13125     2,100,000 Margin of safety (in dollars)     1,400,000 Expected sales     3,500,000 Margin of safety (in percentage of sales) (1,400,000/3,500,000) 0.4 Opeating leverage Unit CM $ Units Contribution Margin 40 21875        875,000 Income from operations        350,000 Operating leverage (875000/350000)               2.50

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