Question

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:

Answer 1

1. The estimated income statement for 20Y8 is: $350,000.

2. The contribution margin ratio is 25%.

3. The Break-even sales in units and dollars is 13,125 and $2,100,000.

4. The Margin of safety in dollars is $1,400,000.

5. The operating leverage is 2.5.

Income statement

1.  Income statement for 20Y8

Sales $3,500,000

(21,875×$160)

Cost of goods sold $2,518,750

[($46+$40+$20×21,875)+$200,000]

Gross profit $981,250

($3,500,000-$2,518,750)

Selling expenses $366,475

[($110,000+$40,000+$12,000+$7,600)+ ($8+$1×21,875)]

Admin expense $264,775

[$132,000+$10,000+$13,400)+($4+$1×21,875)]

Total  expenses $631,250

($366,475+$264,775)

Operating Income $350,000

( $981,250-$631,250)

2. Contribution margin ratio

Contribution margin ratio=[$3,500,000-(120×21,875)]/3,500,000

Contribution margin ratio=[$3,500,000-$2,625,000]/3,500,000

Contribution margin ratio=$875,000/$3,500,000×100

Contribution margin ratio=25%

3. Break-even sales in units and dollars

Break-even sales= ($525,000/$40)

Break-even sales in units=13,125

Break-even sales in dollars=($525,000/25%)

Break-even sales in dollars=$2,100,000

4. Margin of safety in dollars

Margin of safety in dollars=($3,500,000-$2,100,000)  

Margin of safety in dollars=$1,400,000

5. Operating leverage

 Operating leverage=($875,00/$350,000)

Operating leverage=2.5

Inconclusion the estimated income statement for 20Y8 is: $350,000.

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