Problem 19-6 (Algorithmic) Contribution Margin , Break-Even Sales, Cost-Volume-P

Question

Problem 19-6 (Algorithmic)
Contribution Margin, Break-Even Sales, Cost-Volume-Profit Chart, Margin of Safety, and Operating Leverage

Soldner Health Care Products Inc. expects to maintain the same inventories at the end of 2012 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 2012. A summary report of these estimates is as follows:

It is expected that 11,100 units will be sold at a price of $120 a unit. Maximum sales within the relevant range are 14,000 units.

Instructions:

1. Prepare an estimated income statement for 2012.

2. What is the expected contribution margin ratio? Round to the nearest whole percent.
%

3. Determine the break-even sales in units.
units

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?

6. Determine the operating leverage. Round to one decimal place.

Estimated Fixed Cost Estimated Variable Cost
(per unit sold) Production costs: Direct materials $22 Direct labor 14 Factory overhead $284,200 11 Selling expenses: Sales salaries and commissions 59,100 5 Advertising 20,000 Travel 4,400 Miscellaneous selling expense 4,900 4 Administrative expenses: Office and officers' salaries 57,700 Supplies 7,100 2 Miscellaneous administrative expense 6,600 2 Total $444,000 $60

Explanation / Answer

Hi,

Please find the answers as follows:

Part 2:

Contribution Margin Ratio = Contribution/Sales*100 = 666000/1332000*100 = 50%

Part 3:

Break Even Sales (Units) = Fixed Cost/Contribution Margin = 444000/60 = 7400 Units

Part 4:

Break Even Sales (Dollars) = 7400*120 = 888000

Part 5:

Margin of Safety (Dollars) = Sales - Break Even Sales = 1332000 - 888000 = 444000

Margin of Safety (%) = MOS/Sales*100 = 444000/1332000*100 = 33.33% or 33%

Part 6

Degree of Operating Leverage = Contribution/Income = 666000/222000 = 3

Thanks.

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