Wolsey Industries Inc. expects to maintain the same inventories at the end of 20Y8 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: 1 Estimated Fixed Cost Estimated Variable Cost (per unit sold) 2 Production costs: 3 Direct materials — $50.00 4 Direct labor — 32.00 5 Factory overhead $190,000.00 20.00 6 Selling expenses: 7 Sales salaries and commissions 101,000.00 12.00 8 Advertising 36,000.00 — 9 Travel 14,000.00 — 10 Miscellaneous selling expense 7,600.00 1.00 11 Administrative expenses: 12 Office and officers’ salaries 137,000.00 — 13 Supplies 11,000.00 4.00 14 Miscellaneous administrative expense 14,600.00 1.00 15 Total $511,200.00 $120.00 It is expected that 21,300 units will be sold at a price of $160 a unit. Maximum sales within the relevant range are 26,175 units. Required: 1. Prepare an estimated income statement for 20Y8. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries. Enter all amounts as positive values. 2. What is the expected contribution margin ratio? 3. Determine the break-even sales in units and dollars. Round your answers to the nearest whole number. 4. Construct a cost-volume-profit chart on
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Wolsey Industries Inc. expects to maintain the same inventories at the end of 20Y8 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:
1 Estimated Fixed Cost Estimated Variable Cost (per unit sold)
2 Production costs:
3 Direct materials — $50.00
4 Direct labor — 32.00
5 Factory overhead $190,000.00 20.00
6 Selling expenses:
7 Sales salaries and commissions
101,000.00 12.00
8 Advertising 36,000.00 —
9 Travel 14,000.00 —
10 Miscellaneous selling expense
7,600.00 1.00 11 Administrative expenses:
12 Office and officers’ salaries
137,000.00 —
13 Supplies 11,000.00 4.00
14 Miscellaneous administrative expense
14,600.00 1.00
15 Total $511,200.00 $120.00
It is expected that 21,300 units will be sold at a price of $160 a unit. Maximum sales within the relevant range are 26,175 units.
Required:
1. Prepare an estimated income statement for 20Y8. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries. Enter all amounts as positive values.
2. What is the expected contribution margin ratio?
3. Determine the break-even sales in units and dollars. Round your answers to the nearest whole number.
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? Round your answers to the nearest whole number.
6. Determine the operating leverage. Round to one decimal place.
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