P11-6 Contribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverage Organic Health Care Products Inc. expects to maintain the same inventories at the end of
P11-6 Contribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverage Organic 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:
Estimated Fixed Cost Estimated Variable Cost (per unit sold)
Direct materials — $ 8.00
Direct labor — 3.00
Factory overhead $ 200,000 1.50
Advertising 1,450,000 —
Sales salaries and commissions 93,000 1.85
Travel 340,000 —
Miscellaneous selling expense 2,000 0.10
Office and officers’ salaries 300,000 —
Supplies 10,000 0.50
Miscellaneous administrative expense 5,000 0.05
Total $2,400,000 $15.00
On the attaches page,
1. Prepare an estimated income statement for 2012.
2. What is the expected contribution margin ratio?
3. Determine the break-even sales in units.
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
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ORGANIC HEALTH CARE PRODUCTS INC.
Estimated Income Statement
For the Year Ending December 31, 2012
Cost of goods sold:
Cost of goods sold
Sel ing expenses:
Sales salaries and commissions
Miscel aneous sel ing expense
Total sel ing expenses
Office and officers’ salaries
Miscel aneous administrative expense
Total administrative expenses
Income from operations
Contribution margin ratio
Break-even sales (units)
Break-even sales (dol ars)
Use the Autoshapes line feature to construct a cost-volume-profit chart indicating the break-even point.
Click and drag either of the lines to sketch the total revenue and total cost functions on the graph.
This requirement is not automatical y scored.
Margin of safety:
Expected sales (in dol ars)
Break-even point (in dol ars)
Margin of safety (in dol ars)
Margin of safety (in percent)