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: EstimatedFixed Cost Estimated Variable Cost(per unit sold) Production costs: Direct materials — $22 Direct labor — 14 Factory overhead $190,100 11 Selling expenses: Sales salaries and commissions 39,500 5 Advertising 13,400 — Travel 3,000 — Miscellaneous selling expense 3,300 4 Administrative expenses: Office and officers' salaries 38,600 — Supplies 4,800 2 Miscellaneous administrative expense 4,300 2 Total $297,000 $60 It is expected that 6,600 units will be sold at a price of $150 a unit. Maximum sales within the relevant range are 8,000 units. Required: 1. Prepare an estimated income statement for 20Y7. Belmain Co. Estimated Income Statement For the Year Ended December 31, 20Y7 $ Cost of goods sold: $ Total cost of goods sold Gross profit $ Expenses: Selling expenses: $ Total selling expenses $ Administrative expenses: $ Total administrative expenses Total expenses Operating income $ 2. What is the expected contribution margin ratio? Round to the nearest whole percent. % 3. Determine the break-even sales in units and dollars. Units units Dollars $ 4. Construct a cost-volume-profit chart on your own paper. What is the break-even sales?$ 5. What is the expected margin of safety in dollars and as a percentage of sales? Dollars: $ Percentage: (Round to the nearest whole percent.) % 6. Determine the operating leverage. Round to one decimal place.
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 | — | $22 | |||||
| Direct labor | — | 14 | |||||
| Factory |
$190,100 | 11 | |||||
| Selling expenses: | |||||||
| Sales salaries and commissions | 39,500 | 5 | |||||
| Advertising | 13,400 | — | |||||
| Travel | 3,000 | — | |||||
| Miscellaneous selling expense | 3,300 | 4 | |||||
| Administrative expenses: | |||||||
| Office and officers' salaries | 38,600 | — | |||||
| Supplies | 4,800 | 2 | |||||
| Miscellaneous administrative expense | 4,300 | 2 | |||||
| Total | $297,000 | $60 |
It is expected that 6,600 units will be sold at a price of $150 a unit. Maximum sales within the relevant range are 8,000 units.
Required:
1. Prepare an estimated income statement for 20Y7.
| Belmain Co. | |||
| Estimated Income Statement | |||
| For the Year Ended December 31, 20Y7 | |||
| $ | |||
| Cost of goods sold: | |||
| $ | |||
| Total cost of goods sold | |||
| Gross profit | $ | ||
| Expenses: | |||
| Selling expenses: | |||
| $ | |||
| Total selling expenses | $ | ||
| Administrative expenses: | |||
| $ | |||
| Total administrative expenses | |||
| Total expenses | |||
| Operating income | $ |
2. What is the expected contribution margin ratio? Round to the nearest whole percent.
%
3. Determine the break-even sales in units and dollars.
| Units | units |
| Dollars | $ |
4. Construct a cost-volume-profit chart on your own paper. What is the break-even sales?
$
5. What is the expected margin of safety in dollars and as a percentage of sales?
| Dollars: | $ | |
| Percentage: (Round to the nearest whole percent.) | % |
6. Determine the operating leverage. Round to one decimal place.
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