Question

Erin Shelton, Inc., wants to earn a target profit of $930,000 this year. The company’s fixed costs are expected to be $1,260,000 and its variable costs are expected to be 60 percent of sales. Erin Shelton, Inc., earned $830,000 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 $930,000.

4. Prepare a contribution margin income statement based on sales required to earn a target profit of $930,000.

5. When the company earns $930,000 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 costs/CM ratio = 1260000/40%= $3150000
2
Contribution Margin Income Statement
Sales	3150000
Variable costs	1890000	=3150000*60%
Contribution margin	1260000
Fixed costs	1260000
Profit	0
3
Required sales = (1260000+930000)/40%= $5475000
4
Contribution Margin Income Statement
Sales	5475000
Variable costs	3285000	=5475000*60%
Contribution margin	2190000
Fixed costs	1260000
Profit	930000
5
Margn of safety	2325000	=5475000-3150000
Margn of safety as a percentage of sales	42.47%	=2325000/5475000