value: 3.00 points E6-22 Computing Target Profit, Preparing Contribution Margin

Question

value: 3.00 points 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 $950,000 this year. The company's fixed costs are expected to be $1,300,000 and its variable costs are expected to be 60 percent of sales. Erin Shelton, Inc., earned $850,000 in profit last year Required 1. Calculate break-even sales for Erin Shelton, Inc. reak-Even 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 Statemen Contribution Profit 3. Calculate the required sales to meet the target profit of $950,000 arget ales 4. Prepare a contribution margin income statement based on sales required to earn a target profit of $950,000 Contribution Margin Income Statemer Contribution Profit 5. When the company eams $950,000 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. (Le, .1234 should be entered as 12.34% Margin of Safety Margin of Safety as a Percentage of Sales

Explanation / Answer

1) Calculation of break even sales: Break even sales= Fixed cost/ contribution margin ratio Contribution margin ratio= 100- variable cost ratio= 100-60= 40% Break even sales= 1300000/0.40= $3250000 Break even sales=$3250000 2) Contribution margin income staement: Particulars Amount Sales 3250000 Less: Variable cost(3250000*0.6) 1950000 contribution margin 1300000 Less:Fixed cost 1300000 Profit 0 3) Calculation of sales to earn target profit: Sales to earn target profit=( Fixed cost+target profit)/ contribution margin ratio                                                     =(1300000+950000)/0.4= $5625000 Sales to earn target profit is $5625000 4) Contribution margin income staement: Particulars Amount Sales 5625000 Less: Variable cost(5625000*0.6) 3375000 contribution margin 2250000 Less:Fixed cost 1300000 Profit 950000 5) calculation of margin of safety and margin of safety as a percentage of sales: Margin of safety= total sales- break even sales                                  = 5625000-3250000= $2375000 Margin of safety= $2375000 Margin of safety as a percentage of sales= 2375000/5625000*100= 42.22% Margin of safety as a percentage of sales= 42.22%

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