Question

Break-Even in Sales Revenue, Variable-Costing Ratio, Contribution Margin Ratio, Margin of Safety

Hammond Company runs a driving range and golf shop. The budgeted income statement for the coming year is as follows.

Sales	$1,240,000
Less: Variable expenses	706,800
Contribution margin	$533,200
Less: Fixed expenses	425,000
Income before taxes	$108,200
Less: Income taxes	43,280
Net income	$64,920

Required:

1. What is Hammond’s variable cost ratio? Enter your answer as a decimal value rounded to two decimal places.

What is the contribution margin ratio? Enter your answer as a decimal value rounded to two decimal places. (Express as a decimal-based amount rather than a whole percent.)

2. Suppose Hammond’s actual revenues are $200,000 greater than budgeted. By how much will before-tax profits increase? Calculate the answer without preparing a new income statement.
$

3. How much sales revenue must Hammond earn in order to break even? Round your answer to the nearest dollar.
$

What is the expected margin of safety? Round your answer to the nearest dollar.
$

4. How much sales revenue must Hammond generate to earn a before-tax profit of $130,000? Round your answer to the nearest dollar.
$

How much sales revenue must Hammond generate to earn an after-tax profit of $90,000? Round your answer to the nearest dollar.
$

Prepare a contribution margin income statement to verify the accuracy of your last answer. Round your answers to the nearest dollar.

Hammond Company
Contribution Margin Income Statement
Sales	$
Less: Variable expenses
Contribution margin	$
Less: Fixed expenses
Profit before taxes	$
Taxes
Net income	$

Answer 1