The following information applies to the questions displayed

[The following information applies to the questions displayed below.]

Hudson Co. reports the contribution margin income statement for 2017.

1. Assume Hudson Co. has a target pretax income of $158,000 for 2018. What amount of sales (in dollars) is needed to produce this target income?
2. If Hudson achieves its target pretax income for 2018, what is its margin of safety (in percent)? (Round your answer to 1 decimal place.)

Solution

1.

Amount of sales

$ 2,590,000

2.

Margin of safety

30.5

%

Explanation:

1.

Contribution margin ratio = Contribution/sales = $ 660,000/3,300,000 = 0.2 or 20 %

Dollar sales for target income = (Fixed cost + target income)/contribution margin ratio

                                                      = ($ 360,000 + $ 158,000)/0.2

                                                      = $ 518,000 /0.2 = $ 2,590,000

2.

Breakeven sales in Dollar = Fixed cost/ contribution margin ratio

                                     = $ 360,000 /0.2 = $ 1,800,000

Margin of safety % = (Expected sales - Breakeven sales)/ Expected sales

                                   = ($ 2,590,000 - 1,800,000)/$ 2,590,000

                                   = $ 790,000/$ 2,590,000

                                  = 0.305019305 or 30.5 %