In: Accounting
Hudson Co. reports the contribution margin income statement for 2017.
HUDSON CO. | |||
Contribution Margin Income Statement | |||
For Year Ended December 31, 2017 | |||
Sales (9,900 units at $225 each) | $ | 2,227,500 | |
Variable costs (9,900 units at $180 each) | 1,782,000 | ||
Contribution margin | $ | 445,500 | |
Fixed costs | 342,000 | ||
Pretax income | $ | 103,500 |
Assume the company is considering investing in a new machine that will increase its fixed costs by $42,000 per year and decrease its variable costs by $9 per unit. Prepare a forecasted contribution margin income statement for 2018 assuming the company purchases this machine.
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If the company raises its selling price to $240 per unit.
1. Compute Hudson Co.'s contribution margin per
unit.
2. Compute Hudson Co.'s contribution margin
ratio.
3. Compute Hudson Co.'s break-even point in
units.
4. Compute Hudson Co.'s break-even point in sales
dollars.
The marketing manager believes that increasing advertising costs by $84,000 in 2018 will increase the company’s sales volume to 11,300 units. Prepare a forecasted contribution margin income statement for 2018 assuming the company incurs the additional advertising costs.
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Solution 1:
HUDSON CO. | |
Forecasted Contribution Margin Income Statement | |
For Year Ended December 31, 2018 | |
Sales | $2,227,500.00 |
Variable costs | $1,692,900.00 |
Contribution margin | $534,600.00 |
Fixed costs | $384,000.00 |
Income (pretax) | $150,600.00 |
Should the company purchase the machine? | Yes |
Solution 2:
If company raises it selling price to $240 per unit, then
1. Contribution margin per unit = $240 - $180 = $60 per unit
2. Contribution margin ratio = CM per unit / Selling price per unit = $60 / $240 = 25%
3. Breakeven point in units = Fixed costs / CM per unit = $342,000 / $60 = 5700 units
4. Breakeven point in sales dollar = Fixed costs / CM ratio = $342,000 / 25% = $1,368,000
Solution 3:
HUDSON CO. | |
Forecasted Contribution Margin Income Statement | |
For Year Ended December 31, 2018 | |
Sales | $2,542,500.00 |
Variable costs | $2,034,000.00 |
Contribution margin | $508,500.00 |
Fixed costs | $426,000.00 |
Income (pretax) | $82,500.00 |
Should the company incur the additional advertising costs? | No |