Erin Shelton. Inc., wants to earn a target profit of $830,000 this year. The com

Question

Erin Shelton. Inc., wants to earn a target profit of $830,000 this year. The company's fixed costs are expected to be $1,060,000 and its variable costs are expected to be 60 percent of sales. Erin Shelton. Inc., earned $730,000 in profit last year. Calculate break-even sales for Erin Shelton, Inc. Prepare a contribution margin income statement on the basis break-even sales. Calculate the required sales to meet the target profit of $830,000. Using a contribution margin income statement format with the sales to meet the target profit of $830,000.

Explanation / Answer

Calculation of Break even sales

Break even sales = Fixed cost   

Margin ratio

Calculation of margin ratio = sales- variable cost (variable exppenses is 60% of sales)

=

This means that the contribution margin ratio is 40%. (Sales minus the variable expenses of 60% of sales leaves a remainder of 40% of sales. In other words, after deducting the variable expenses there remains only 40% of every sales dollar to go towards the fixed expenses and profits. ) The fixed expenses of $1,060,000 divided by the contribution margin ratio o 40% equals $ 2,650,000

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