Question

Required information The following information applies to the questions displayed below.] Hudson Co. reports the contribution margin income statement for 2017 HUDSON CO. Contribution Margin Income Statement For Year Ended December 31, 2017 Sales (11,200 units at $280 each) Variable costs (11,200 units at $210 each) Contribution margin Fixed costs Pretax income $3,136,00 2,352.000 $ 784,000 567.000 $ 217.000 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.) 1 Amount of sales 2 Margin of safety

Answer 1

1) Contribution margin ratio= Contribution margin*100/Sales

= $784000*100/3136000= 25%

Amount of sales= (Fixed cost+Target pretax income)/Contribution margin ratio

= $(567000+156000)/25%

= $2892000

2) Break even sales= Fixed cost/Contribution margin ratio

= $567000/25%= $2268000

Margin of safety (in percent)= (Expected sales-Break even sale)/Expected sales

= $(2892000-2268000)/2892000= 21.6%

3) New variable cost per unit= $210-10= $200

HUDSON CO.
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2018
Sales (11200*$280)	$3136000
Variable cost (11200*$200)	2240000
Contribution margin	896000
Fixed costs (567000+37500)	604500
Pretax income	291500
Should the company purchase the machine?	Yes

Yes, the company should purchase the machine as the pretax income will increase by purchasing the machine.

4) Contribution margin= Selling price-Variable cost

= $300-210= $90 per unit

Contribution margin ratio= Contribution margin*100/Sales

= $90*100/300= 30%

Break-even point= Fixed cost/Contribution margin

= $567000/90= 6300 units

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

= $567000/30%= $1890000

1	Contribution margin	$90	per unit
2	Contribution margin ratio	30	%
3	Break-even point	6300	units
4	Break-even sales dollars	$1890000

5)

HUDSON CO.
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2018
Sales (12600*$280)	$3528000
Variable cost (12600*$210)	2646000
Contribution margin	882000
Fixed costs (567000+188000)	755000
Pretax income	$127000
Should the company incur the additional advertising cost?	No

No, the company should not incur the additional advertising cost as the pretax income will decreases if the company incur the additional advertising cost.