Wolsey Industries Inc. expects to maintain the same inventories at the end of 20
ID: 341078 • 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 Estimated Fixed Cost Estimated Variable Cost (per unit sold) Production costs Direct labor $200,000 110,000 12,000 Selling expenses: Travel Miscellaneous selling expense 7,600 Administrative expenses: 132,000 Supplies.... 10,000 13, $525,000 $120 It is expected that 21,875 units will be sold at a price of S160 a unit. Maximum sales within the relevant range are 27,000 units. Instructions 1. Prepare an estimated income statement for 2016. Net income-$350,000 2. What is the expected contribution margin ratio? 3. Determine the break-even sales in units and dollars, S2,100,000 4, what is the expected margin of safety in dollars and as a percentage of sales? 40% 5. Determine the operating leverage
Explanation / Answer
WOLSEY INDUSTRIES INC. Estimated Income Statement For the year ended December 31, 2016 Sales 35,00,000 Cost of Goods Sold: Direct materials 10,06,250 Direct labor 8,75,000 Factory overhead 6,37,500 Cost of Goods Sold 25,18,750 Gross profit 9,81,250 Expenses: Selling Expenses Sales Salaries 2,85,000 Advertising 40,000 Travel 12,000 Misc. Selling expense 29,475 3,66,475 Adminstrative Expenses Office and Officers Salaries 1,32,000 Supplies 97,500 Misc. Admin expense 35,275 Total Administrative expense 2,64,775 Total Expenses 6,31,250 Income from operations 3,50,000 Contribution margin ratio: Sales 35,00,000 Units Units Varaible cost Varaible costs 21875 120 26,25,000 Contribution margin 8,75,000 Sales 35,00,000 Contribution margin 8,75,000 Ratio (Contribution margin/ Sales X100) 25% Break even Sales: Fixed Costs 5,25,000 Sale price - Unit Varible cost Unit contribution margin 160 120 40 Break even Sales (units) ($525,000/$40) 13,125 Sale price 160 Break even Sales (dollars) 21,00,000 Margin of Safety: Sale price Units Expected sales 160 21,875 35,00,000 Break even point 160 13,125 21,00,000 margin of safety (In dollars) 14,00,000 Expected sales 35,00,000 margin of safety (as a percentage of sales) 40% Operating Leverage: Unit CM $ Units Contribution margin 40 21,875 875,000 Income from operations 350,000 Operating Leverage 2.5 CM ratio Contribution margin/Sales *100 Varible expense ratio Variable expense/Sales *100 Break even in unit sales Fixed expenses/ contribution per unit Break even in dollar sales Break even units * selling price per unit margin of safety in dollar Actual sales - Break even sales margin of safety percentage (Actual sales - Break even sales)/ Actual Sales *100 Operating leverage Contribution margin/Income from operations
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