Reference no: EM13370208

Evaluate Contribution Margin, Break-Even Sales, Cost-Volume-Profit Chart, Margin of Safety, and Operating Leverage

Baker Co. expects to maintain the similar inventories at the end of 2012 as at the start of the year. The total of all production costs for the year is thus assumed to be equal to the cost of goods sold. With this in mind, the several department heads were asked to submit estimates of the costs for their departments during 2012. A summary report of these estimates is as follows:

It is predictable 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. Create an estimated income statement for 2012.

Baker Co.
Estimated Income Statement
For the Year Ended December 31, 2012

Cost of goods sold:

Cost of goods sold

Gross profit

Expenses:
Selling expenses:

Total selling expenses

Administrative expenses:

Total administrative expenses

Total expenses

Income from operations

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Partially Correct

1. Use the absorption costing format.

2. Evaluate the expected contribution margin ratio and round to the nearest whole percent.

3. Find the break-even sales in units.

4. Prepare a cost-volume-profit chart on your own paper. What is break-even sales?

5. Determine the expected margin of safety in dollars and as a percentage of sales?

6. Evaluate the operating leverage.