Contribution Margin Income Statement For Year Ended December 31, 2015 Sales (9,9

Question

Contribution Margin Income Statement For Year Ended December 31, 2015 Sales (9,900 units at S250 each) Variable costs (9,900 units at $200 each) $ 2,475,000 1,980,000 Contribution margin Fixed costs S 495,000 280,000 Pretax income S 235,000 1. Assume Hudson Co. has a target pretax income of $185,000 for 2018. What amount of sales (in dollars) is needed to produce this target income? Amount of salesS 2,125,000 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.) Margin of safety

Explanation / Answer

Contribution Margin=    Sales- Variable Costs

Pre- tax income = Contribution Margin - Fixed Costs

New pre tax income= 165000 $

Fixed costs remain same= 260000 $

Hence, new Contribution Margin= Fixed Costs + New pre tax income

                                                = 2600000 + 165000 = 425000 $

New Variable costs = 200 $ * X units

New Sales = 250 $ * X units

Hence, new Contribution Margin=          new Sales- new Variable Costs

4250000 = X* (250-200)

So number of units = X = 4250000/ 50 = 8500 units

Hence, new total sales amount in $ = 8500 * 250 = 2125000 $

Margin of safety (%) = (Current sales level – breakeven point) / Current sales level X 100

Breakeven point in $ = Fixed Cost + (New Contribution Margin/ New Sales)

                                = 260000 + ( 4250000/ 2125000) = 260002 $

Hence Margin of safety (%) becomes now = (2125000- 260002)/ 2125000 * 100

                                = 87.76% or 87.8%

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