Question

Erin Shelton, Inc., wants to earn a target profit of $960,000 this year. The company’s fixed costs are expected to be $1,320,000 and its variable costs are expected to be 40 percent 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. (Do not leave any cells blank, enter a zero wherever required.)



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? (Round your "Percentage Sales" answer to 2 decimal places. (i.e. .1234 should be entered as 12.34%.))

Answer 1

1, breakeven sales($) = fixed cost/ contribution to sales ratio

$1320000/.6 = $2200000

2. contribution margin income statement

sales ($) 2200000

- variable cost(40%) 880000

contribution ($) 1320000

- fixed cost 1320000

profit 0

3.required contribution = target profit + fixed cost = $960000+ $1320000 = $2280000

requires sales = required contribution / contribution to sales ratio = $2280000/.60 = $3800000

4 contribution margin statement

sales $ 3800000

- variaable cost (40%) $1520000

contribution (60%) $2280000

- fixed cost $1320000

profit $960000

5. mos = actual sales - break even point(BEP)

BEP = FIXED COST / PV RATIO

=$ 1320000/ .6 = $2200000

MARGIN OF SAFETY = $( 3800000-2200000)

=$1600000

MOS(%)= ACTUAL SALES - BES/ACTUAL SALES *100

=$( 3800000-2200000/3800000)*100 = 42.10%