Contribution Margin, Break-Even Sales, Cost-Volume-Profit Chart, Margin of Safety, and Operating Leverage 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 Cost Estimated Variable Cost (per unit sold) Production costs: Direct materials — $28 Direct labor — 19 Factory overhead $98,800 14 Selling expenses: Sales salaries and commissions 20,500 6 Advertising 6,900 — Travel 1,500 — Miscellaneous selling expense 1,700 6 Administrative expenses: Office and officers' salaries 20,100 — Supplies 2,500 2 Miscellaneous administrative expense 2,440 3 Total $154,440 $78 It is expected that 5,280 units will be sold at a price of $156 a unit. Maximum sales within the relevant range are 7,000 units. Required: 1. Prepare an estimated income statement for 20Y7. Belmain Co. Estimated Income Statement For the Year Ended December 31, 20Y7 $fill in the blank 160b410e1f8a05a_2 Cost of goods sold: $fill in the blank 160b410e1f8a05a_4 fill in the blank 160b410e1f8a05a_6 fill in the blank 160b410e1f8a05a_8 Total cost of goods sold fill in the blank 160b410e1f8a05a_9 Gross profit $fill in the blank 160b410e1f8a05a_10 Expenses: Selling expenses: $fill in the blank 160b410e1f8a05a_12 fill in the blank 160b410e1f8a05a_14 fill in the blank 160b410e1f8a05a_16 fill in the blank 160b410e1f8a05a_18 Total selling expenses $fill in the blank 160b410e1f8a05a_19 Administrative expenses: $fill in the blank 160b410e1f8a05a_21 fill in the blank 160b410e1f8a05a_23 fill in the blank 160b410e1f8a05a_25 Total administrative expenses fill in the blank 160b410e1f8a05a_26 Total expenses fill in the blank 160b410e1f8a05a_27 Operating income $fill in the blank 160b410e1f8a05a_28 2. What is the expected contribution margin ratio? Round to the nearest whole percent. fill in the blank 35d75bfacfeb023_1 % 3. Determine the break-even sales in units and dollars.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Contribution Margin, Break-Even Sales, Cost-Volume-Profit Chart, Margin of Safety, and Operating Leverage
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 Cost |
Estimated Variable Cost (per unit sold) |
||||||
| Production costs: | |||||||
| Direct materials | — | $28 | |||||
| Direct labor | — | 19 | |||||
| Factory |
$98,800 | 14 | |||||
| Selling expenses: | |||||||
| Sales salaries and commissions | 20,500 | 6 | |||||
| Advertising | 6,900 | — | |||||
| Travel | 1,500 | — | |||||
| Miscellaneous selling expense | 1,700 | 6 | |||||
| Administrative expenses: | |||||||
| Office and officers' salaries | 20,100 | — | |||||
| Supplies | 2,500 | 2 | |||||
| Miscellaneous administrative expense | 2,440 | 3 | |||||
| Total | $154,440 | $78 |
It is expected that 5,280 units will be sold at a price of $156 a unit. Maximum sales within the relevant range are 7,000 units.
Required:
1. Prepare an estimated income statement for 20Y7.
| Belmain Co. | |||
| Estimated Income Statement | |||
| For the Year Ended December 31, 20Y7 | |||
| $fill in the blank 160b410e1f8a05a_2 | |||
| Cost of goods sold: | |||
| $fill in the blank 160b410e1f8a05a_4 | |||
| fill in the blank 160b410e1f8a05a_6 | |||
| fill in the blank 160b410e1f8a05a_8 | |||
| Total cost of goods sold | fill in the blank 160b410e1f8a05a_9 | ||
| Gross profit | $fill in the blank 160b410e1f8a05a_10 | ||
| Expenses: | |||
| Selling expenses: | |||
| $fill in the blank 160b410e1f8a05a_12 | |||
| fill in the blank 160b410e1f8a05a_14 | |||
| fill in the blank 160b410e1f8a05a_16 | |||
| fill in the blank 160b410e1f8a05a_18 | |||
| Total selling expenses | $fill in the blank 160b410e1f8a05a_19 | ||
| Administrative expenses: | |||
| $fill in the blank 160b410e1f8a05a_21 | |||
| fill in the blank 160b410e1f8a05a_23 | |||
| fill in the blank 160b410e1f8a05a_25 | |||
| Total administrative expenses | fill in the blank 160b410e1f8a05a_26 | ||
| Total expenses | fill in the blank 160b410e1f8a05a_27 | ||
| Operating income | $fill in the blank 160b410e1f8a05a_28 |
2. What is the expected contribution margin ratio? Round to the nearest whole percent.
fill in the blank 35d75bfacfeb023_1 %
3. Determine the break-even sales in units and dollars.
| Units | fill in the blank 35d75bfacfeb023_2 units |
| Dollars | $fill in the blank 35d75bfacfeb023_3 |
4. Construct a cost-volume-profit chart on your own paper. What is the break-even sales?
$ fill in the blank 35d75bfacfeb023_4
5. What is the expected margin of safety in dollars and as a percentage of sales?
| Dollars: | $fill in the blank 35d75bfacfeb023_5 | |
| Percentage: (Round to the nearest whole percent.) | fill in the blank 35d75bfacfeb023_6 | % |
6. Determine the operating leverage. Round to one decimal place.
fill in the blank 35d75bfacfeb023_7
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