Required information The following information applies to the quest ions display

Question

Required information The following information applies to the quest ions displayed below.J 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 $ (50,000)

Explanation / Answer

1) Sale price per unit = $1,000,000/20,000 units = $50 per unit

Variable cost per unit = $800,000/20,000 units = $40 per unit

Contribution margin per unit = Sale price - Variable cost

= $50 - $40 = $10 per unit

Contribution margin ratio = Contribution matgin/sale price

= $10/$50 = 0.20 or 20%

Break Even Point in dollar sales = Current Fixed cost/Contribution margin ratio

= $250,000/20% = $1,250,000

2) Revised variable cost per unit = $40 per unit*50% = $20 per unit

Proposed contribution margin = $50 - $20 = $30 per unit

Revised Contribution margin ratio = $30/$50 = 0.60 or 60%

Break even point in dollar sales = Revised fixed cost/Revised Contribution margin ratio

= ($250,000+$200,000)/60% = $450,000/60% = $750,000

3) ASTRO COMPANY

Forecasted Contribution Margin Income Statement

For year ended december 31, 2018 (Amounts in $)

4) Desired contribution margin = Fixed costs+Required profit

= $450,000+$200,000 = $650,000

Break even point in dollar sales = Desired contribution margin/CM ratio

= $650,000/60% = $1,083,333

Break even point in units = Break even sales in dollar/Sale price per unit

= $1,083,333/50 per unit = 21,666.67 units

5) ASTRO COMPANY

Forecasted Contribution Margin Income Statement

For year ended december 31, 2018 (Amounts in $)

Sales (20,000 units*$50 per unit) 1,000,000 Less: Variable costs (20,000 units*$20 per unit) (400,000) Contribution Margin 600,000 Less: Fixed costs ($250,000+$200,000) (450,000) Net Income 150,000

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