Problem - Baker Co. 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:
Estimated Fixed costs Estimated Variable cost(per unit sold)
Production costs:
Direct materials $30.00
Direct Labor 15.00
Factory overhead $240,000 5.00
Selling expenses:
Sales salaries and commission 43,000 3.00
Advertising 12,000
Travel 4,200
Misc. selling expense 2,300 2.50
Administrative expenses:
Office and officers' salaries 110,000
Supplies 16,000 2.50
Misc. Administrative expense 22,500 2.00
Total $450,000 $60.00
It is expected that 40,000 units will be sold at a price of $75 a unit. Maximum sales within the relevant range are 45,000 units.
Instructions
1. Prepare an estimated contribution margin income statement for 2012. (must include the actual expenses that fit into each category)
2. What is the expected contribution margin ratio?
3. Determine the break-even sales in units and dollars.
4. Construct a cost-volume-profit chart indicating 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.