Question

E6-22 Computing Target Profit, Preparing Contribution Margin Income Statement, Computing Margin of Safety [LO 6-2, 6-3]

Erin Shelton, Inc., wants to earn a target profit of $820,000 this year. The company’s fixed costs are expected to be $1,040,000 and its variable costs are expected to be 50 percent of sales. Erin Shelton, Inc., earned $720,000 in profit last year.

Required:
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.)



3. Calculate the required sales to meet the target profit of $820,000.



4. Prepare a contribution margin income statement based on sales required to earn a target profit of $820,000.



5. When the company earns $820,000 of net income, what is its margin of safety and margin of safety as a percentage of sales? (Round your "Percentage Sales" answer to 2 decimal places. (i.e. .1234 should be entered as 12.34%.))

Answer 1

• All working forms part of the answer
• Requirement 1

A	Profits earned last year	$          720,000.00
B	Fixed Costs	$      1,040,000.00
C = A+B	Total Contribution margin last year	$      1,760,000.00
D	variable cost as % of sale	50%
E = 100% - D	contribution margin as % of sale	50%
F = B/E	Break Even sales for Erin Shelton	$      2,080,000.00

• Requirement 2

A	Sales revenue	$      2,080,000.00
B = A x 50%	Variable cost	$      1,040,000.00
C = A - B	Contribution margin	$      1,040,000.00
D	Fixed Cost	$      1,040,000.00
E = C - D	Net Income	$                           -

• Requirement 3

A	Target Profits	$          820,000.00
B	Fixed Costs	$      1,040,000.00
C = A+B	Total Contribution margin required	$      1,860,000.00
D	Contribution margin ratio	50%
E = D/C	Required sale for target profits	$      3,720,000.00

• Requirement 4

A	Sales revenue	$      3,720,000.00
B = A x 50%	Variable cost	$      1,860,000.00
C = A - B	Contribution margin	$      1,860,000.00
D	Fixed Cost	$      1,040,000.00
E = C - D	Net Income	$          820,000.00

• Requirement 5

A	Sales required to earn target Net Income	$      3,720,000.00
B	Break Even sale [calculated above]	$      2,080,000.00
C = A - B	Margin of Safety Sale	$      1,640,000.00
D = (C/A) x 100	Margin of Safety % of sale	44.00%