Erin Shelton, Inc., wants to earn a target profit of $840,000 this year. The com

Question

Erin Shelton, Inc., wants to earn a target profit of $840,000 this year. The company's fixed costs are expected to be $1,400,000 and its variable costs are expected to be 44 percent of sales. Erin Shelton, Inc., earned $900,000 in profit last year. Required: 1. Calculate break-even sales for Erin Shelton, Inc. ak-Even Sales 2. Prepare a contribution margin income statement on the basis break-even sales. (Do not leave any cells blank, enter a zero wherever required.) Contribution Margin Income Statement Contribution Margin Profi 3. Calculate the required sales to meet the target profit of $840,000. t Sales

Explanation / Answer

1. Break even sales = fixed cost / contribution margin

= $1400000 / (sale - variable cost)

= $1400000 / [1-0.44]

= $1400000 / 0.56

= $2500000

2. sale = $2500000

less: variable cost[44%*2500000] = 1100000

Contribution margin = 1400000

less: fixed cost = 1400000

profit = 0

3. Required sales = Desired profit / Contribution margin per unit + break even units

= [$840000 / $56 ] + 25000

=15000 + 25000

= 40000

Required sale in $ = 40000 * $100

= $4000000

  

4. sale = $4000000

less: variable cost[44%*4000000] = 1760000

Contribution margin = 2240000

less: fixed cost = 1400000

profit = 840000

5. margin of safety = actual sales - break even point

= $4000000 - $2500000

= $1500000

margin of safety ratio = [ actual sales - break even point ] / actual sales

= [$4000000 - $2500000] / $4000000

= $1500000 / $4000000

= 37.5%

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