Erin Shelton Inc wants to earn a target profit of 960000 thi

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%.))

Solution

1. Break Even Sales = Fixed expenses/Contribution margin percentage = 1320000/0.6 = $2,200,000

2. Contribution Margin Income Statement:

Sales = 2200000

(-) Variable costs @40% = 880000

Contribution Margin = 1320000

(-) Fixed costs = 1320000

Net Income = 0

3. Target Income Sales in Dollars = (Fixed Costs + Target Income)/Contribution Margin Ratio

= (1320000 + 960000)/0.6 = $3,800,000

4. Contribution Margin Income Statement:

Sales = 3800000

(-) Variable costs @40% = 1520000

Contribution Margin = 2280000

(-) Fixed costs = 1320000

Net Income = $960,000

5. Margin of Safety = Actual Sales - Break Even Sales = 3800000 - 2200000 = $1,600,000

Margin of Safety as a % of Sales = Margin of Safety/Actual Sales = 1600000/3800000 = 42.10%