Cost Behavior and Cost-Volume-Profit Analysis
Warren / Reeve / Duchac
Problem 19-6B solution
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Contribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverage
Steamboat Co. expects to maintain the same inventories at the end of 2010 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 2010. A summary report of these estimates is as follows:
It is expected that 30,000 units will be sold at a price of $60 a unit. Maximum sales within the relevant range are 45,000 units.
1. Prepare an estimated income statement for 2010.
STEAMBOAT CO.
Estimated Income Statement
For the Year Ended December 31, 2010
Sales 1,800,000
Cost of goods sold:
Direct Materials 450,000
Direct Labor 300,000
Factory Overhead 345,000
Cost of goods sold 1,095,000
Gross profit 705,000
Expenses:
Selling expenses:
Sales salaries and commissions 108,500
Advertising 14,500
Travel 3,500
Misc. Selling Expense 56,500
Total selling expenses 183,000
Administrative expenses:
Office and officers' salaries 70,000
Supplies 28,500
Misc. administrative expense 63,500
Total administrative expenses 162,000
Total expenses 345,000
Income from operations 360,000
2. What is the expected contribution margin ratio? Round to nearest whole percent.
40%
3. Determine the break-even sales in units.
15,000 units
4. Construct a cost-volume-profit chart (on your own paper) indicating the break-even sales.
$900,000
5. What is the expected margin of safety in dollars and as a percentage of sales?
Dollars: $900,000
Percentage: 50%
6. Determine the operating leverage. Round to nearest whole number.
2
