Question

Erin Shelton, Inc., wants to earn a target ofit of $960,000 this year. The company's fixed costs are expected to be $1,320,000 and its variable costs are expected to 10 nt of sales. Erin Shelton, Inc., earned $860,000 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 $960,000, 4. Prepare a contribution margin income statement based on sales required to earn a target profit of $960,000. 5. When the company earns $960,000 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 s Calculate break-even sales for Erin Shelton, Inc. Break Even Sales Reed Required 2 >

Answer 1

(1)

Break Even Sales

$        2,200,000

(2)

Contribution Margin Income Statement
Sales	$        2,200,000
Variable cost	$            880,000
Contribution margin	$        1,320,000
Fixed cost	$        1,320,000
Profit	$                       0

(3)

Target Sales

$        3,800,000

(4)

Contribution Margin Income Statement
Sales	$        3,800,000
Variable cost	$        1,520,000
Contribution margin	$        2,280,000
Fixed cost	$        1,320,000
Profit	$            960,000

(5)

Margin of Safety	$        1,600,000
Margin of Safety as percentage of sales	42.11	%

Explanations :-

(1)

Break Even Sales
Fixed cost	$        1,320,000
÷ Contribution margin	60%
Break Even Sales	$        2,200,000

(3)

Target Sales
Target Profit	$            960,000
Add: Fixed cost	$        1,320,000
Target contribution	$        2,280,000
÷ Contribution margin	60%
Target Sales	$        3,800,000

(5)

Margin of Safety
Target Sales	$        3,800,000
Less: Break Even Sales	$        2,200,000
Margin of Safety	$        1,600,000
Margin of Safety as percentage of sales
Margin of Safety	$        1,600,000
÷ Target Sales	$        3,800,000
Margin of Safety as percentage of sales	42.11%