Required information Problem 18-4A Break-even analysis; income targeting and for

Question

Required information Problem 18-4A Break-even analysis; income targeting and forecasting LO C2, P2, A1 (The following information applies to the questions displayed below Astro Co. sold 20,000 units of its only product and incurred a $50,000 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 50% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $200.000. 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 $1,000,000 800,000 200,000 250,000 S (50,000)

Explanation / Answer

Answer 1 Computation of break even point in dollar sales for Year 2017 Contribution Margin per unit Current Sales $50.00 Variable costs $40.00 Contribution Margin   $10.00 Contribution Margin ratio Contribution Margin / Sales = Contribution Margin Ratio $10 / $50 = 20% Break even point in sales dollars Fixed Cost / Contribution Margin % = Break even point in dollars $250000 / 20% = $12,50,000 Answer 2 Computation of break even point in dollar sales for Year 2018 Contribution Margin per unit Proposed Sales $50.00 Variable costs $20.00 Contribution Margin   $30.00 Contribution Margin ratio Contribution Margin / Sales = Contribution Margin Ratio $30 / $50 = 60% Break even point in sales dollars Fixed Cost / Contribution Margin % = Break even point in dollars $450000 / 60% = $7,50,000 Answer 3 ASTRO COMPANY Forecasted Contribution Margin Income statement For the Year ended December 31,2018 Sales $1,000,000.00 Variable Costs $400,000.00 Contribution Margin $600,000.00 Fixed Costs $450,000.00 Net Income $150,000.00 Answer 4 Sales level required in dollars [Fixed cost + Target pretax Income] / Contribution Margin % = Sales dollar required $650000 / 60% = $10,83,333 Sales level required in Units [Fixed cost + Target pretax Income] / Contribution Margin per unit = Sales dollar required $650000 / $30 = 21667 units Answer 5 ASTRO COMPANY Forecasted Contribution Margin Income statement For the Year ended December 31,2018 $ Per Unit $ Sales $50.00 $1,083,334 Variable Costs $20.00 $433,333 Contribution Margin $30.00 $650,000 Fixed Costs $450,000 Net Income $200,000

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