Question

Blanchard Company manufactures a single product that sells for $150 per unit and whose total variable costs are $120 per unit. The company's annual fixed costs are $471,000.

Exercise 18-17 Target income and margin of safety (in dollars) LO C2

1. Assume Hudson Co. has a target pretax income of $156,000 for 2018. What amount of sales (in dollars) is needed to produce this target income?

2. If Hudson achieves its target pretax income for 2018, what is its margin of safety (in percent)? (Round your answer to 1 decimal place.)

Answer 1

1. a.

Sales price per unit	$ 150
Variable cost per unit	120
Contribution margin per unit	$ 30

b.

	Choose Numerator	/	Choose Denominator	=	Contribution Margin Ratio
	Contribution Margin	/	Sales Price	=	Contribution Margin Ratio
	$ 30	/	$ 150	=	20 %

c.

	Choose Numerator	/	Choose Denominator	=	Break-even Units
	Total Fixed Costs	/	Contribution margin per unit	=	Break-even units
	$ 471,000		$ 30		15,700 units

d.

	Choose Numerator	/	Choose Denominator	=	Break-even Dollars
	Total Fixed Costs	/	Contribution Margin Ratio	=	Break-even Dollars
	$ 471,000	/	20 %	=	$ 2,355,000

2.

1.	Break-even point	6,300	units
2.	Break-even point	$ 1,764,000

3.

1.	Amount of Sales	$ 4,080,000
2.	Margin of Safety	19.1	%

Amount of sales = $ ( 660,000 + 156,000 ) / 0.20 = $ 4,080,000.

Break-even point = $ 660,000 / 0.20 = $ 3,300,000

Margin of safety = $ ( 4,080,000 - 3,300,000 ) / $ 4,080,000 = 19.12 %