QUESTION 3 (a) Contribution income statement Total Per unit Sales Less: Variable expenses Contribution margin Less: fixed expenses $300 000 $60 $165 000 $33 $135 000 $27 $108 000 Net operating income $27 000 (b) Break even sales = Fixed expenses/contribution margin ratio 108 000/ 45% $240 000 Break even units = fixed expenses/ contribution margin per unit $108 000/27 000 = 4 000 units (c) Sales for target profit is = (fixed expenses + target profit)/ contribution margin ratio. ($108 000+ $54 000)/ 45% = $360 000 Margin of safety = current sales - break even sales $300 000 $240 000 = $60 000