Astro Co. sold 24,000 units of its only product and incurred a $82,000 loss (ign

Question

Astro Co. sold 24,000 units of its only product and incurred a $82,000 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2016’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 $260,000. The maximum output capacity of the company is 40,000 units per year. ASTRO COMPANY Contribution Margin Income Statement For Year Ended December 31, 2015 Sales $ 960,000 Variable costs 768,000 Contribution margin 192,000 Fixed costs 274,000 Net loss $ (82,000 )

Problem 21-4A Part 4

Compute the sales level required in both dollars and units to earn $180,000 of target pretax income in 2016 with the machine installed and no change in unit sales price. (Do not round intermediate calculations. Round your answers to 2 decimal places. Round "Contribution margin ratio" to nearest whole percentage)

Problem 21-4A Part 5

Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume no income taxes will be due. (Do not round intermediate calculations. Round "per unit answers" to 2 decimal places and other answers to nearest whole dollar.)

4.

Compute the sales level required in both dollars and units to earn $180,000 of target pretax income in 2016 with the machine installed and no change in unit sales price. (Do not round intermediate calculations. Round your answers to 2 decimal places. Round "Contribution margin ratio" to nearest whole percentage)

Problem 21-4A Part 5

5.

Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume no income taxes will be due. (Do not round intermediate calculations. Round "per unit answers" to 2 decimal places and other answers to nearest whole dollar.)

Explanation / Answer

4. Selling Price per unit = $ 960,000 / 24,000 = $ 40

Variable cost per unit = $ 768,000 / 24,000 x 50% = $ 16

Contribution margin per unit = Selling price per unit - Variable cost per unit = $ 40 - $ 16 = $ 24

Fixed costs = $ 534,000

Sales level in units required to earn pretax income of $ 180,000 = Fixed costs + Target income / Contribution margin per unit = (534,000 + 180,000) / 24 = 29,750 units

Sales level in dollars = 29,750 x $ 40 = $ 1,190,000

5. Forecasted Contribution Margin Income Statement:

$ Sales ( 29,750 x $ 40) 1,190,000 Variable costs ( 29,750 x $ 16) 476,000 Contribution margin 714,000 Fixed costs 534,000 Operating income 180,000

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