Question

Erin Shelton, Inc., wants to earn a target profit of $920,000 this year. The company's fixed costs are expected to be $1.240,000 and its variable costs are expected to be 50 percent of sales. Erin Shelton, Inc., earned $820,000 in profit last year. Required: 1. Calculate break-even sales for Erin Shelton, Inc. 2. Prepare a contribution margin income statement on the basis break-even sales. 3. Calculate the required sales to meet the target profit of $920,000. 4. Prepare a contribution margin income statement based on sales required to earn a target profit of $920,000. 5. When the company earns $920,000 of net income, what is its margin of safety and margin of safety as a percentage of sales? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Required 5 Calculate break-even sales for Erin Shelton, Inc. Break-Even Sales

Answer 1

Required : 1 Break even sales = Fixed cost / Contribution margin ratio Fixed cost 1240000 Contribution margin ratio 50% Break even sales 2480000 Required : 2 Contribution margin Income statement Break even sales Less: Variable cost 2480000 1240000 Contribution margin Less: Fixed cost 1240000 1240000 Profit Required :3 Target sales =(Fixed cost + Target profit)* Contribution margin ratio Fixed cost 1240000 Target profit 920000 Contribution margin ratio 50% Target sales 4320000

Required:4 Contribution margin Income statement Target sales Less: Variable cost 4320000 2160000 Contribution margin Less: Fixed cost 2160000 1240000 Profit 920000 Required : 5 Margin of safety = Actual sales - Bep Sales Target sales Break even sales Margin of safety 4320000 2480000 1840000 Margin of safety Percentage = Margin of safety / Actual sales Margin of safety 1840000 Target sales 4320000 Margin safety percentage 42.59%

Working notes:

820000 1240000 2060000 Contribution = Net Profit + Fixed cost Net Profit Fixed cost Contribution margin Sales Contribution Margin + Variable expenses Contribution margin Variable expense Sales 2060000 2060000 4120000