Question

PR 19-6A Contribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverage Blythe Industries 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 as- sumed 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 Cost Estimated Variable Cost (per unit sold) $340,000 Production costs: Direct materials. ............. Direct labor ............................. Factory overhead........................... Selling expenses: Sales salaries and commissions... Advertising Travel ........................ ..... . . . Miscellaneous selling expense .............. Administrative expenses Office and officers' salaries .................. Supplies................ Miscellaneous administrative expense........ Total ................ 80,000 32,000 8,000 7,600 120,000 8,000 4,400 $600,000 It is expected that 8,000 units will be sold at a price of $200 a unit. Maximum sales within the relevant range are 9,000 units.

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Answer 1

B13 5 C D E F G Н I K L М O P Q R. S T 1 2 units sales total cost 4. cost-volume-profit chart $ 200,000 $ 675,000 $ 750,000 S 825,000 1,000 S 400,000 S 600,000 $ 800,000 $ 1,000,000 4 2,000 $2,000,000 5 3,000 900,000 6 4,000 $ 1,800,000 7 5,000 $ 975,000 $1,050,000 $ 1,125,000 $ 1,200,000 $ 1,275,000 8 $ 1,200,000 6.000 $1,600,000 $ 1,400,000 7,000 10 $ 1,600,000 8,000 11 $ 1,800,000 9,000 $1,400,000 12 BEP break even sales $600,000 break even sales 13 ($200- $75) 5 $1,200,000 14 4800 units 15 total sales (dollars) 8,000* $200 $1,600,000 contribution margin ratio ($200 $75)/$200 62.5 % break even sales (dollars) $600,000/62.5% break even sales (dollars) $1,000,000 16 17 $ 960,000 18 800,000 19 margin of safety sales (dollars) $1,600,000 $960,000 margin of safety sales (dollars) margin of safety as a percentage of total sa les 20 $ 640,000 $ 600,000 21 40% 22 23 sales $1,600,000 6 $ 400,000 S 600,000 24 less: variable costs 25 contribution margin $1,000,000 S 600,000 $200,000 26 less: fixed costs $ 400,000 27 net operating income 28 1,000 2,000 4,000 3,000 5,000 6,000 7,000 8,000 9,000 29 operating leverage contribution margin /operating income sales 30 total cost operating leverage $1,000,000/$400,000 operating leverage 31 2.5 32 BEP Break Even Point 33

for formulas and calculations, refer to the image below -

fx X B13 5 A В C D E F G Н I К L M N O P Q R S T 1 4 2. sales total cost units cost-volume-profit chart -200*C3 1000 -600000+(C3*75) -600000+(C4*75) -600000+(C5*75) -600000+(C6*75) -600000+(C7 75) $ 2,000,000 4 -200*C4 2000 -200*C5 5 3000 6 4000 200*C6 $1,800,000 7 5000 -200*C7 600000+(C8*75) -600000+ (C9*75) 600000+(C10*75) -600000+(C11*75) 8 6000 -200*C8 $1,600,000 7000 -200 C9 10 8000 -200*C10 - 200*C11 11 9000 $1,400,000 12 break even sales $600,000/($200 $75) 600000/(200-75) 13 $1,200,000 break even sales 14 units 15 total sales (dollars) 8,000* $200 $1,600,000 contribution margin ratio ($200 $75)/ $200 62.5% break even sales (dollars) $600,000/62.5% break even sales (dollars) margin of safety sales (dollars) $1,600,000- $960,000 margin of safety sales (dollars) $1,000,000 16 17 600000/62.5% 18 800,000 19 |-_ - 1600000-960000 640000/1600000 20 600,000 21 margin of safety as a percentage of total sales = 22 -8000*200 -8000*75 -E23-E24 6 23 sales 400,000 less: variable costs 24 25 contribution margin less: fixed costs $200,000 -600000 -E25-E26 26 27 net operating income 28 1,000 2,000 3,000 4,000 5,000 6,000 7,000 в 000 9,000 29 operating leverage contribution margin operating income total cost $1,000,000/ $400,000 - 1000000/400000 30 operating leverage sale s operating leverage 31 32 BEP Break Even Point 33

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