Question

Use the following information for the Exercises below. Skip to question [The following information applies to the questions displayed below.] Hudson Co. reports the contribution margin income statement for 2019. HUDSON CO. Contribution Margin Income Statement For Year Ended December 31, 2019 Sales (11,200 units at $280 each) $ 3,136,000 Variable costs (11,200 units at $210 each) 2,352,000 Contribution margin 784,000 Fixed costs 567,000 Pretax income $ 217,000 Exercise 18-17 Target income and margin of safety (in dollars) LO C2 1. Assume Hudson Co. has a target pretax income of $156,000 for 2020. What amount of sales (in dollars) is needed to produce this target income? 2. If Hudson achieves its target pretax income for 2020, what is its margin of safety (in percent)? (Round your answer to 1 decimal place.)

Answer 1

Answer:

1. $2,892,000

2. 21.58%

Explanation:

1. Calculation to determine What amount of sales (in dollars) is needed to produce this target income

First step is to calculate the Contribution margin ratio

Contribution margin ratio =$784,000 /$ 3,136,000 Contribution margin ratio= 25%

Now let calculate the Required sales using this formula

Required sales = (Fixed cost+Target income)/Contribution margin ratio

Let plug in the formula

Required sales= ($567,000 +$156,000)/0.25 =

Required sales=$723,000/0.25

Required sales=$2,892,000

Therefore the amount of sales (in dollars) needed to produce this target income will be $2,892,000

2. Calculation to determine margin of safety (in percent)

First step is to calculate the Break even sales

Break even sales = ($567,000/0.25)

Break even sales= $2,268,000

Now let calculate Margin of safety (%

Margin of safety (%) =$2,892,000- $2,268,000)/$2,892,000

Margin of safety (%)=$624,000/$2,892,000

Margin of safety (%)=0.2158

Margin of safety (%)=21.58%

Therefore margin of safety (in percent) will be 21.58%