Question

Astro Co. sold 20,900 units of its only product and incurred a $71,860 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 $159,000. The maximum output capacity of the company is 40,000 units per year.

A. Compute the break-even point in dollar sales for year 2017.

B. Compute the predicted break-even point in dollar sales for year 2018 assuming the machine is installed and there is no change in the unit selling price. (Round your answers to 2 decimal places.)

C. Prepare a forecasted contribution margin income statement for 2018 that shows the expected results with the machine installed. Assume that the unit selling price and the number of units sold will not change, and no income taxes will be due. (Do not round intermediate calculations. Round your answers to the nearest whole dollar.)

D. Compute the sales level required in both dollars and units to earn $290,000 of target pretax income in 2018 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)

E. 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.)

ASTRO COMPANY
Contribution Margin Income Statement
For Year Ended December 31, 2017

Sales $802,560  

Variable costs  601,920  

Contribution margin  200,640

Fixed costs  272,500  

Net loss $(71,860)

Answer 1

ASTRO COMPANY
Contribution Margin Income Statement
For Year Ended December 31, 2018
Sales		$	802,560
Variable costs			601,920
Contribution margin			200,640
Fixed costs			272,500
Net loss		$	(71,860	)
1.Compute the break-even point in dollar sales for year 2017. (Round your answers to 2 decimal places.)
Selling Price per unit= Sales / No of units sold
=$802,560 / 20,900
= $38.4 sales price per unit
Variable Price per unit=Variable cost/ No of units sold
= $601,920 / 20,900
= $28.80 variable cost per unit
Contribution per unit= Selling Price per unit- Variable Price per unit
=$38.40-$28.80
=$5.60
Break even point in units= Fixed cost/ Contribution per unit
=$272,500/$9.60
=    28,385 units
Contribution margin ratio= Contribution per unit/ Selling Price per unit x 100
=$9.60/$38.40 X 100
=25%
Break even point in $= Fixed cost/ Contribution margin ratio
=$272,500/25%
=$1,090,000
2.Compute the predicted break-even point in dollar sales for year 2018 assuming the machine is installed and there is no change in the unit selling price
Revised Fixed Cost= Existing Fixed Cost+ Additional Fixed Cost
=$272,500+$159,000
=$431,500
Selling Price=$38.40
Revised Variable Cost per unit= Existing Variable Cost- [Existing Variable x % of reduction]
=$28.80-[$28.80x 40%]
=$28.80 x 60%
=$17.28
Revise Contribution per unit= Selling Price- Revised Variable Cost per unit
=$38.40-$17.28
=$21.12
Revised Break even point in units= Revised Fixed cost/ Contribution per unit
=$431,500/$21.12
=20,430 units
Contribution margin ratio= Contribution per unit/ Selling Price per unit x 100
=$21.12/$38.40 X 100
=55%
Break even point in $= Fixed cost/ Contribution margin ratio
=$431,500/55%
=$ 784,545
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3.Prepare a forecasted contribution margin income statement for 2018 that shows the expected results with the machine installed. Assume that the unit selling price and the number of units sold will not change, and no income taxes will be due. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Astro Company
Contribution Margin Income Statement
For Year Ended Dec. 31 2016
Particulars			Amount
Sales	20,900 x 38.4		$          802,560
Less: Varibale Cost	20,900 x 17.28		$       (361,152)
Contribution Margin			$          441,408
Less: Fixed Cost	272,500+159,000		$       (431,500)
Net Gain			$              9,908
4 .Compute the sales level required in both dollars and units to earn $290,000 of target pretax income in 2018 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)
Desired sales in units =Target Profit + Fixed Cost/ Contribution per unit
=$290,000+$431,500/$21.12
=$ 721,500/$21.12
= 34,161.93 units
Desired sales in $ =Target Profit + Fixed Cost/ Contribution margin ratio
=$290,000+$431,500/55%
= $721,500/55%
= $ 1,311,818.18
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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.)
Astro Company
Contribution Margin Income Statement
For Year Ended Dec. 31 2016
Particulars			Amount
Sales	34,161.94x 38.4		$      1,311,818
Less: Variable Cost	34,161.94 x 17.28		$       (590,318)
Contribution Margin			$          721,500
Less: Fixed Cost	272,500+159,000		$       (431,500)
Net Gain			$          290,000