Astro Co. sold 20,100 units of its only product and incurred a $63,560 loss (ign
ID: 2611345 • Letter: A
Question
Astro Co. sold 20,100 units of its only product and incurred a $63,560 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 40% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $151,000. The maximum output capacity of the company is 40,000 units per year. ASTRO COMPANY Contribution Margin Income Statement Sales Variable costs Contribution margin Fixed costs Net loss $755,760 566,820 -188,940 - 252,500 $ (63,560)Explanation / Answer
1. Break even point in dollar sales for the year 2017-
a. Break-even point (in Sales) = Fixed Cost/ Contribution margin ratio
Contribution margin ratio= Contribution margin/ Sales*100
= $188940/ $755760 * 100 = 25%
Fixed Cost = $2,52,500
Break-even point (in Sales $) = $252500/0.25 = $10,10,000
Break-even point (in units) = Fixed Cost/ Contribution per units
= $252500/$9.40 per unit = 26,861.70 units
where, Contribution per unit = 188940/20100 = $9.4 per unit
2. Break- even point in sales for the year 2018-
Unit Selling Price= $755760/20100 = $37.6 per unit
Sales = 40000 * $37.6 = $15,04,000
Variable cost = $566820 - 40% = $3,40,092
Contribution margin = Sales - Variable cost = $1504000 - $340092 = $11,63,908
Contribution margin per unit = $1163908/40,000 = $29.09 per unit
Contribution margin ratio = 1163908/1504000 *100 = 77.39%
Break-even point (in Sales dollar) = $151000/0.7739 = $1,95,115.64
4. Sales level required both in units and dollars-
Unit Sales = Fixed cost + Target profit / Contribution margin per unit
= $151,000 + $210,000 / $29.09 = 12,409.76 units
Sales (dollars) = Fixed cost + Target profit/ Contribution margin ratio
= $151,000 + $210,000/ 0.7739 = $466,468.53
where, Target profit = $210,000
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