**Question:**

Break-Even in Sales Revenue, Variable-Costing Ratio, Contribution Margin Ratio, Margin of Safety

Hammond Company runs a driving range and golf shop. The budgeted income statement for the coming year is as follows.

Required:

- What is Hammond’s variable cost ratio? Enter your answer as a decimal value rounded to two decimal places.

What is the contribution margin ratio? Enter your answer as a decimal value rounded to two decimal places. (Express as a decimal-based amount rather than a whole percent.)

- Suppose Hammond’s actual revenues are $200,000 greater than budgeted. By how much will before-tax profits increase? Calculate the answer without preparing a new income statement.

$ - How much sales revenue must Hammond earn in order to break even? Round your answer to the nearest dollar.

$

What is the expected margin of safety? Round your answer to the nearest dollar.

$

- How much sales revenue must Hammond generate to earn a before-tax profit of $130,000? Round your answer to the nearest dollar.

$

How much sales revenue must Hammond generate to earn an after-tax profit of $90,000? Round your answer to the nearest dollar.

$

Prepare a contribution margin income statement to verify the accuracy of your last answer. Round your answers to the nearest dollar.

**Answer:**

Answer 1

Variable cost ratio = Variable costs / Sales * 100

= 706,800 / 1,240,000 * 100

= 57%

Contribution ratio = 100 – Variable cost ratio

= 100 – 57%

= 43%

Answer 2

Increase in revenue = Increase in sales * contribution ratio

= 200,000 * 43%

= $ 86,000

Answer 3

Break even point = Fixed cost / Contribution ratio

= 425,000 / 43%

= $ 988,372.

Margin of safety = Actual sales – Break even sales

= 1,240,000 – 988,372

= $ 251,628

Answer 4

Sales for desired profit of $ 130,000 = (425,000 + 130,000) / 43%

= $ 1,290,698

Sales for desired profit of $ 90,000 = (425,000 + 150,000) / 43%

= $ 1,337,209