Question

Erin Shelton, Inc., wants to earn a target profit of $840,000 this year. The company’s fixed costs are expected to be $1,080,000 and its variable costs are expected to be 70 percent of sales. Erin Shelton, Inc., earned $740,000 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 $840,000.



4. Prepare a contribution margin income statement based on sales required to earn a target profit of $840,000.



5. When the company earns $840,000 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) Break even sales = Fixed cost/Contribution margin ratio = 1080000/.30 = $3600000

2) Contribution margin income statement

	Total	%
Sales	3600000	100%
Variable cost	2520000	70%
Contribution margin	1080000	30%
Fixed cost	1080000
Net operating income	0

3) Required sales = (1080000+840000)/.30 = $6400000

4) Contribution margin income statement

	Total	%
Sales	6400000	100%
Variable cost	4480000	70%
Contribution margin	1920000	30%
Fixed cost	1080000
Net operating income	840000

5) Margin of safety = 6400000-3600000 = 2800000

Margin of safety percentage = 2800000/6400000 = 43.75%