Question

Erin Shelton, Inc., wants to earn a target profit of $870,000 this year. The company’s fixed costs are expected to be $1,140,000 and its variable costs are expected to be 50 percent of sales. Erin Shelton, Inc., earned $770,000 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.

3. Calculate the required sales to meet the target profit of $870,000.

4. Prepare a contribution margin income statement based on sales required to earn a target profit of $870,000.

5. When the company earns $870,000 of net income, what is its margin of safety and margin of safety as a percentage of sales?

Complete this question by entering your answers in the tabs below.

• Required 1
• Required 2
• Required 3
• Required 4
• Required 5

Calculate break-even sales for Erin Shelton, Inc.

Break-Even Sales

• Required 2
• Required 3
• Required 4
• Required 5

Prepare a contribution margin income statement on the basis of break-even sales.

Contribution Margin Income Statement
Contribution Margin
Profit

• Required 3
• Required 4
• Required 5

Calculate the required sales to meet the target profit of $870,000.

Target Sales

• Required 4
• Required 5

Prepare a contribution margin income statement based on sales required to earn a target profit of $870,000.

Contribution Margin Income Statement
Contribution Margin
Profit

• Required 5

When the company earns $870,000 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%.))

Margin of Safety
Margin of Safety as a Percentage of Sales		%

Answer 1

Solution;

1.Break-even sales = Fixed costs / Contribution margin ratio

= $1,140,000 / (1-0.50) = $2,280,000

2. Required sales to meet the target profit of 870,000 = (Fixed costs+ target profit )/ C.M. ratio

= ($1,140,000+870,000) / 0.50

= $4,020,000

3. contribution margin income statement on the basis of break-even sales

4. Contribution margin income statement at target level of profit

5.  Margin of safety = Sales - sales at BEP level

= $4,020,000 - $2,280,000 = $1,740,000