Question

6 Erin Shelton, Inc., wants to earn a target profit of $970,000 this year. The company's fixed costs are expected to be $1,340,000 and its variable costs are expected to be 50 percent of sales. Erin Shelton, Inc., earned $870,000 In profit last year. 1.36 points 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 $970,000. 4. Prepare a contribution margin Income statement based on sales required to earn a target profit of $970,000. 5. When the company earns $970,000 of net Income, what is its margin of safety and margin of safety as a percentage of sales? Art colate

Answer 1

When sales is $1 then variable cost is $0.50 results in contribition margin = $1 - $0.50 = $0.50

	Answer 1
	Net income	$        870,000
Add:	Fixed costs	$     1,340,000
	Contribution margin	$     2,210,000
Add:	Variable costs (2210000*0.5/0.5)	$     2,210,000
	Sales	$     4,420,000
	Contribution margin	$     2,210,000
Divided by:	Sales	$     4,420,000
	Contribution margin ratio	50%
	Fixed costs	$     1,340,000
Divided by:	Contribution margin ratio	50%
	Break even sales	$     2,680,000

Answer 2
	Sales at break even	$        2,680,000
Less:	Variable costs (2680000*50%)	$        1,340,000
	Contribution margin	$        1,340,000
Less:	Fixed costs	$        1,340,000
	Profit	$                         0

Answer 3
	Target profit	$            970,000
Add:	Fixed costs	$        1,340,000
	Contribution margin required	$        2,310,000
Divided by:	Contribution margin ratio	50%
	Required sales	$        4,620,000

Answer 4
	Sales for target profit	$        4,620,000
Less:	Variable costs (4620000*50%)	$        2,310,000
	Contribution margin	$        2,310,000
Less:	Fixed costs	$        1,340,000
	Profit	$            970,000

Answer 5
	Sales for target profit	$        4,620,000
Less:	Break even sales	$        2,680,000
	Margin of safety	$        1,940,000
	Margin of safety	$        1,940,000
Divided by:	Sales	$        4,620,000
	Margin of safety as percentage of sales	41.99%