[The following information applies to the questions displayed below.] Hudson Co.
ID: 2399977 • Letter: #
Question
[The following information applies to the questions displayed below.]
Hudson Co. reports the contribution margin income statement for 2017.
1. Assume Hudson Co. has a target pretax income of $158,000 for 2018. What amount of sales (in dollars) is needed to produce this target income?
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.)
HUDSON CO. Contribution Margin Income Statement For Year Ended December 31, 2017 Sales (11,000 units at $300 each) $ 3,300,000 Variable costs (11,000 units at $240 each) 2,640,000 Contribution margin $ 660,000 Fixed costs 360,000 Pretax income $ 300,000
Explanation / Answer
1.
Amount of sales
$ 2,590,000
2.
Margin of safety
30.5
%
Explanation:
1.
Contribution margin ratio = Contribution/sales = $ 660,000/3,300,000 = 0.2 or 20 %
Dollar sales for target income = (Fixed cost + target income)/contribution margin ratio
= ($ 360,000 + $ 158,000)/0.2
= $ 518,000 /0.2 = $ 2,590,000
2.
Breakeven sales in Dollar = Fixed cost/ contribution margin ratio
= $ 360,000 /0.2 = $ 1,800,000
Margin of safety % = (Expected sales - Breakeven sales)/ Expected sales
= ($ 2,590,000 - 1,800,000)/$ 2,590,000
= $ 790,000/$ 2,590,000
= 0.305019305 or 30.5 %
1.
Amount of sales
$ 2,590,000
2.
Margin of safety
30.5
%
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