Question

Required information The following information applies to the questions displayed below.] Hudson Co. reports the contribution margin income statement for 2017 HUDSON CO. Contribution Margin Income Statement For Year Ended December 31, 2017 Sales (11,200 units at $280 each) Variable costs (11,200 units at $210 each) Contribution margin Fixed costs Pretax income $3,136,00 2,352.000 $ 784,000 567.000 $ 217.000 1. Assume Hudson Co. has a target pretax income of $156,000 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.) 1 Amount of sales 2 Margin of safety

Answer 1

Requirement 1 Target Pre tax income $ 156,000.00 No of units to be sold to achieve target income - fixed cost + target profit / contribution margin ratio (567000+156000)/25% 2,892,000.00 Requirement 2 Margin of safety % = Margin of safety sales / total sales * 100 Total sales - 11200*280 Less : Break even sales Margin of safet sales 3,136,000.00 (2,268,000.00) 868,000.00 Margin of safety % = 868000/3136000 27.7%

Requirement 1 Contribution per unit = selling price - variable cost Contribution per unit = 280-210 = $70 per unit Requirement 2 Contribution margin ratio = 70/280*100 25% Requirement 3 Break even Point (units) - Fixed Cost / Contribution Per Unit Contribution per unit = 280-210 = $70 per unit 567000/70 8100 Units Requirement 4 Break even Point (units) - Fixed Cost / Contribution margin ratio Contribution margin ratio = 70/280*100 567000/25% 2,268,000.00

Requirement : Fixed cost increase by $37500 Variable cost decrease by $10 per unit Hudson Co. Forecasted contribution margin statement For Year ended December 31, 2018 Sales Less : Variable cost Contribution Less; Fixed cost Income (pretax) Should company purchase machine 3,136,000.00 11200*280 (2,240,000.00) 11200*200 896,000.00 (604,500.00) 567000+37500 291,500.00 Yes Since there is an increase in pre tax income from $217000 to $291500

Requirement : Hudson Co. Forecasted contribution margin statement For Year ended December 31, 2018 Sales Less : Variable cost Contribution Less; Fixed cost Income (pretax) 3,528,000.00 12600*280 (2,646,000.00) 12600*210 882,000.00 (755,000.00) 567000+188000 127,000.00 Should company incur addl advt charges No Since company pretax income decreased from $217,000 to $127,000