Astro Co. sold 19,000 units of Its only product and Incurred a $128,000 loss (ig

Question

Astro Co. sold 19,000 units of Its only product and Incurred a $128,000 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2018's activities, the production manager notes that variable costs can be reduced 30% by installing a machine that automates several operations. To obtain these savings, the company must Increase Its annual fixed costs by $140,000. The maximum output capacity of the company is 40,000 units per year ASTRO COMPANY Contribution Margin Income Statement For Year Ended December 31, 2017 Sales Variable costs Contribution margin Fixed costs Net loss $ 760,eee 608,eee 152,eee 28,eee $ (128,eee) Problem 18-4A Part 2 2. Compute the predicted break-even point In dollar sales for year 2018 assuming the machine Is Installed and there is no change In the unit selling price. (Round your answers to 2 declmal places.) Contribution margin per unit Proposed Contribution Margin Ratio Choose Numerator: Choose Denominator: Contribution Margin Ratio - Contribution margin ratio reak-even point in dollar sales with new machine: Choose Numerator: Choose Break-Even Point in Dollars - Break-even point in dollars

Explanation / Answer

Required : In the given queastion we are required to compte the Predicted break neven point for 2018.

Assume that the sales price doesn't change

Solution: Since the question wants us to use the same Sales price therefore the predicted sales price will be same as the past Sales Price.

Sale Price Per unit = Sales amount / Units Sold

Sales price per unit ($760000/ 19000) = $40

Variable cost (608000/19000)              = $32

Proposed Variable Cost {32 * (100%-30%) } = $22.4

NOTE: Since in the given information of the question we are required to reduce the variable cost per unit of the product by 30% , therefore the computation for the proposed Variable cost will be done by reducing 30% from the present variable cost.

CONTRIBUTION MARGIN PER UNIT

PROPOSED

Sales

$ 40

Per pair

Variable cost

$ 22.4

Per pair

Contribution Margin

$ 17.6

Per pair

Contribution margin is a product’s price minus/ as reduced by all associated variable costs, resulting in the incremental profit earned by the business  for each unit sold.

Contribution = Sales price - variable cost

=40-22.4

=S17.6

CONTRIBUTION MARGIN RATIO

Choose Numerator

           /

Choose Denominator

=

CONTRIBUTION MARGIN RATIO

Contribution per unit

        /

Sales per unit

=

Contribution margin per unit

$17.6

        /

$40

=

44%

Contribution Margin Ratio represents the This ratio indicates the percentage of each sales dollar that is available to cover a company's fixed expenses and profit

Contribution Margin Ratio = Contribution per unit/ Sales per unit

=$17.6/40 * 100

=44%

Break Even Point in Dollars

Choose Numerator

           /

Choose Denominator

=

Break Even Point in Dollars

Total Fixed Cost

        /

Contribution margin ratio

=

Break Even Point in Dollars

$ 420000

        /

44%

=

954545

The Breakeven point is the sales volume at which a business earns exactly no Profit no Loss

Break even point = Fixed Cost / Contribution margin ratio

Break-even in sales dollars

=

Fixed costs / Contribution margin ratio

= $420000/ 44%

= $ 954545

Note 2 : To compute predicted fixed cost

Past fixed cost and additiosnal fixed cost will constitute the predicted fixed cost

Predicted Fixed Cost = $280000 + $ 140000

                                     = $ 420000

CONTRIBUTION MARGIN PER UNIT

PROPOSED

Sales

$ 40

Per pair

Variable cost

$ 22.4

Per pair

Contribution Margin

$ 17.6

Per pair

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