Question

Required information [The following information applies to the questions displayed below.) Hudson Co. reports the contribution margin income statement for 2019. HUDSON CO. Contribution Margin Income Statement For Year Ended December 31, 2019 Sales (11, 500 units at $225 each) Variable costs (11,500 units at $180 each) Contribution margin Fixed costs Pretax income $2,587,500 2,070,000 517,500 360,000 $ 157,500 1. Assume Hudson Co. has a target pretax income of $154,000 for 2020. What amount of sales (in dollars) is needed to produce this target income? 2. If Hudson achieves its target pretax income for 2020, what is its margin of safety (in percent)? (Round your answer to 1 decimal place.) 1. Amount of sales 2. Margin of safety 2. margin of salevy A

Answer 1

Selling price per unit = $225

Variable cost per unit = $180

Contribution margin per unit = Selling price per unit – Variable cost per unit

= 225 - 180

= $45

Contribution margin ratio = Contribution margin per unit/Selling price per unit

= 45/225

= 20%

Break even sales in dollars = Fixed cost/Contribution margin ratio

= 360,000/20%

= $1,800,000

1.

Dollar Sales to get a target profit = (Fixed cost + Target profit)/Contribution margin ratio

= (360,000 + 154,000)/20%

= 514,000/20%

= $2,570,000

2.

Margin of safety in dollar sales = Present sales - Break even sales

= 2,570,000 - 1,800,000

= $770,000

Margin of safety (%) = Margin of safety/Present sales

= 770,000/2,570,000

= 30%

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