Erin Shelton, Inc., wants to earn a target profit of $860,000 this year. The companys fixed costs are expected to be $1,120,000 and its variable costs are expected to be 60 percent of sales. Erin Shelton, Inc., earned $760,000 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.

3. Calculate the required sales to meet the target profit of $860,000.

4. Prepare a contribution margin income statement based on sales required to earn a target profit of $860,000.

5. When the company earns $860,000 of net income, what is its margin of safety and margin of safety as a percentage of sales?

Break-Even Sales

Contribution Margin Income Statement
Contribution Margin
Profit

• Cost of Goods Sold
• Fixed Costs
• Gross Margin
• Interest Expense
• Net Income After Taxes
• Net Operating Income
• Sales
• Variable Costs

Calculate the required sales to meet the target profit of $860,000.

Target Sales

• Contribution Margin Income Statement
  Contribution Margin
  Profit

• Margin of Safety
• Margin of Safety as a Percentage of Sales %