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)

Production costs:

Direct materials — $ 8.00

Direct labor — 3.00

Factory overhead $ 200,000 1.50

Selling expenses:

Advertising 1,450,000 —

Sales salaries and commissions 93,000 1.85

Travel 340,000 —

Miscellaneous selling expense 2,000 0.10

Administrative expenses:

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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Problem 11-6
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1.
ORGANIC HEALTH CARE PRODUCTS INC.
Estimated Income Statement
For the Year Ending December 31, 2012
Sales
Cost of goods sold:
Direct materials
Direct labor
Factory overhead
Cost of goods sold
Gross profit
Operating expenses:
Sel ing expenses:
Sales salaries and commissions
Advertising
Travel
Miscel aneous sel ing expense
Total sel ing expenses
Administrative expenses:
Office and officers’ salaries
Supplies
Miscel aneous administrative expense
Total administrative expenses
Total expenses
Income from operations
2.
Contribution margin ratio
=

=
3.
Break-even sales (units)
=
=
Break-even sales (dol ars)
=
=
sales
4.
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.
$15,000,000
$12,500,000
$10,000,000
$7,500,000
$5,000,000
$2,500,000
$0
0
100,000
200,000
300,000
400,000
500,000
600,000
5.
Margin of safety:
Expected sales (in dol ars)
Break-even point (in dol ars)
Margin of safety (in dol ars)
or
Margin of safety (in percent)
=
=
6.
Operating leverage
=
=
Instructions

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