Astro Co. sold 20,400 units of its only product and incurred a $53,368 loss (ign

Question

Astro Co. sold 20,400 units of its only product and incurred a $53,368 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 $154,000. 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 $ 773,160   Variable costs 618,528   Contribution margin 154,632   Fixed costs 208,000   Net loss $ (53,368 ) lus: 10.00 points Required Informatlon Problem 21-4A Part 2 2. Compute the predicted break-even pcint in dolar sales tar year 2016 assuming the machine is installed and there is no change in the unit selling price. (Round your answers to 2 decimal places.y n margin per un 0.00 Contribution Margin Ratio Choose Numerator: Choose Denominator:Contribution Margin Ratio Contribution margin ratio even point in dollar sales with new machine: Choose Numerator Choose Denominator: 1 = Break-Even Point in Dollars Break-even pcint in dollars References eBook &Resources; Expanded table 1:27 PM Type here to search 11/23/2017

Explanation / Answer

Answer 1.

2015:

Sales = $773,160
Variable Costs = $618,528
Contribution Margin = $154,632
Number of units sold = 20,400

Selling Price = $773,160 / 20,400
Selling Price = $37.90

Variable Cost per unit = $618,528 / 20,400
Variable Cost per unit = $30.32

Contribution Margin per unit = Contribution Margin / Number of units sold
Contribution Margin per unit = $154,632 / 20,400
Contribution Margin per unit = $7.58

Contribution Margin Ratio = Contribution Margin per unit / Selling Price
Contribution Margin Ratio = $7.58 / $37.90
Contribution Margin Ratio = 20%

Break-even Point in dollars = Fixed Costs / Contribution Margin Ratio
Break-even Point in dollars = $208,000 / 20%
Break-even Point in dollars = $1,040,000

Answer 2.

Installation of Machine can reduce variable costs by 50% but fixed costs will increase by $154,000

Variable Costs per unit = $30.32 * 50%
Variable Costs per unit = $15.16

Fixed Costs = $208,000 + $154,000
Fixed Costs = $362,000

Selling Price = $37.90

Contribution Margin per unit = Selling Price - Variable Costs per unit
Contribution Margin per unit = $37.90 - $15.16
Contribution Margin per unit = $22.74

Contribution Margin Ratio = Contribution Margin per unit / Selling Price
Contribution Margin Ratio = $22.74 / $37.90
Contribution Margin Ratio = 60%

Break-even Point in dollars = Fixed Costs / Contribution Margin Ratio
Break-even Point in dollars = $362,000 / 60%
Break-even Point in dollars = $603,333

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