Question

Erin Shelton, Inc., wants to earn a target profit of $840,000 this year. The company’s fixed costs are expected to be $1,400,000 and its variable costs are expected to be 44 percent of sales. Erin Shelton, Inc., earned $900,000 in profit last year.

Calculate break-even sales for Erin Shelton, Inc

Prepare a contribution margin income statement on the basis break-even sales. (Do not leave any cells blank, enter a zero wherever required.)

Calculate the required sales to meet the target profit of $840,000.

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

When the company earns $840,000 of net income, what is its margin of safety and margin of safety as a percentage of sales?

Answer 1

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

Contribution margin ratio = 100-44 = 56%

= 1400000/.56

Break even sales = 2500000

b) Contribution margin income statement :

Sales	2500000
Less: Variable cost	-1100000
Contribution margin	1400000
Less; Fixed cost	-1400000
Net operating income	0

c) Required sales = (1400000+840000)/.56 = 4000000

d) Income statement :

Sales	4000000
Less: Variable cost	-1760000
Contribution margin	2240000
Less: Fixed cost	-1400000
Net operating income	840000

e) Margin of safety = 4000000-2500000 = 1500000

Margin of safety ratio = 1500000*100/4000000 = 37.5%