E622 Computing Target Profit Preparing Contribution Margin I

E6-22 Computing Target Profit, Preparing Contribution Margin Income Stetement, Computing Margin of Safety LO 6-2,6-3 Erin Shelton, Inc., wants to eam a target profit of $990,000 this year. The company\'s flixed costs are expected to be $1,380,000 and its variable costs are expected to be 75 percent of sales. Erin Shelton, Inc., earned $890,000 in profit last year 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.) Margin Prof 3. Calculate the required sales to meet the target profit of $990,000. 4. Prepare a contribution margin income statement based on sales required to ean a target profit of $990,000. Margin I Prof 5 When the company earns $990 000 o net income, what s its margin of safety and margin o safety as a percentage o sales? Round your Percentage Sales answer to 2 decim a places. Le .1234 should be entered as 12.34%. Margin of Safety Margin of Safety as a of Sales

Solution

Req 1. Variable cost ratio to sales: 75% CM ratio: 100-75 = 25% Total contribution =1380000+890000 =2270000 Total sales: 2270000 /25% = 9080,000 Fixed cost: 1380000 Break even sales in $: Fixed cost / CM ratio = 1380000 /25% = 5520,000 Req 2: Contribution margin Income statement Sales revenue 5520000 Less: Variable cost 4140000 Contribution margin   1380000 Less: Fixed cst 1380000 Net income 0 Req 3: Target profit: 990,000 Desired contribution= 1380000+990000 = 2370000 Target Sales in $: Desired contribution /CM ratio 2370000 /25% = 9480,000 Req 4: Contribution margin Income statement Sales revenue 9480000 Less: Variable cost 7110000 Contribution margin   2370000 Less: Fixed cst 1380000 Net income 990000 Req 5: Margin of safety: Sales -Break even sales 9080,000 -5520000 =3560,000 Margin of Safety as % of sales: 3560000 /9080000 *100 = 39.21%