eluc 0.50 points Erin Shelton, Inc., wants to eam a target proft of $830,000 thi

Question

eluc 0.50 points Erin Shelton, Inc., wants to eam a target proft of $830,000 this year. The oompany's ftxed costs are expected to be $1,060,000 and its varlable costs are expected to be 60 peroent of sales. Erin Shelton, Inc., earned $730,000 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.) Contribution Margin Income Statement Contribution Margin Profit 3.Calculate the required sales to meet the target profit of $830,000. Talgel Sales 4. Prepare a contribution margln Income statement based on sales required to earn a target profit of $830,000. Contribution Margin Income Statement Contribution Margin Profit 5. When the company earns $830,000 of net income, what is its margin of safety and margin af safety as a percentage of sales? (Round your "Percentage Sales" answer to 2 decimal places. (i.e. .1234 should be entered as 12.34%.)) Margin of Satery Margin of Satety as a Percentage of Sals

Explanation / Answer

REQUIREMENT 1 - BREAK EVEN SALES = FIXED COST / PV RATIO

PV RATIO

= CONTRIBUTION / SALES

= 40 / 100

= 40 %

ALTERNATE METHODE

PV RATIO

= 1 - VARIABLE COST RATIO

= 1 - 0.60

= 0.40

= 40 %

BREAK EVEN SALES

= FIX COST / PV RATIO

= 1060000 / 40 %

= 2650000 $

This Means Company will have NO LOSS NO PROFIT at the sales level of 2650000 $.

REQUIREMENT 2 -

CONTRIBUTION MARGIN INCOME STATEMENT ON THE BASIS OF BREAK EVEN SALES

SALES = 2650000 $

LESS - VARIABLE COST = 1590000 $ ( 2650000 X 60 % )

CONTRIBUTION = 1060000 $ ( 2650000 - 1590000)

LESS - FIXED COST = 1060000 $

NET PROFIT = 0 $ (CONTRIBUTION - FIXED COST )

REQUIREMENT 3 - SALES AT DESIRED PROFIT OF 830000 $

SALES AT DESIRED PROFIT  = ( FIXED COST + DESIRED PROFIT ) / PV RATIO

= ( 1060000 + 830000 ) / 40 %

= 1890000 / 40 %

= 4725000 $

This Means in order to earn profit of 830000 $ company have to make sales of 4725000 $

REQUIREMENT 4 -

CONTRIBUTION MARGIN INCOME STATEMENT ON THE BASIS OF SALES REQUIRED TO EARN PROFIT OF 830000 $

SALES = 4725000 $

LESS - VARIABLE COST = 2835000 $ ( 4725000 X 60 % )

CONTRIBUTION = 1890000 $ ( 4725000 - 2835000)

LESS - FIXED COST = 1060000 $

NET PROFIT = 830000 $ (CONTRIBUTION - FIXED COST )

REQUIREMENT 5 - MARGIN OF SAFETY WHEN COMPANY EARNS 830000 $

MARGIN OF SAFETY

= SALES - BREAK EVEN SALES

= 4725000 - 2650000

= 2075000 $

MARGIN OF SAFETY AS PERCENTAGE OF SALES

= ( MARGINE OF SAFETY / SALES ) X 100

= ( 2075000 / 4725000 ) X 100

= 43.91 %

THIS MEANS WHILE COMPANY IS EARNING PROFIT OF 830000 $ IT HAS MARGIN OF SAFETY 2075000 $.

MEANS EVEN IF THE SALES OF COMPANY ARE REDUCED BY 2075000 $ OR 43.91%, IT WILL NOT COME IN TO LOSSES.

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