Question

[The following information applies to the questions displayed below.] 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 2018’s activities, the production manager notes that variable costs can be reduced by 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, 2017 Sales $ 773,160 Variable costs 618,528 Contribution margin 154,632 Fixed costs 208,000 Net loss $ (53,368 ) 4. Compute the sales level required in both dollars and units to earn $240,000 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)

Answer 1

		Computation of the sales level required in both dollars and units to earn $240,000 of target pretax income in 2018
		Sale price per unit	= $ 37.90   ( 773,160 / 20,400 )
		Reduced Variable cost per unit	= $ 15.16 (( 618, 528 / 20,400 )*50%)
		Contribution per unit	= $ 22.74     ( 37.90 - 15.16 )
		Profit Volume ratio	= Contribution/ Sales X 100
			= 22.74 / 37.90 x 100
			= 60%
	a.)	Sale level in Dollars	= (Fixed costs + Desired profit) -------------------------------------------
			Profit Volume ratio
			= (208,000 + 154,000 ) + 240,000 ----------------------------------------------
				60%
			= 602,000 --------------
			60%
		Sale level in Dollars	= $ 1,003,333
	b.)	Sale Level in Units	= Sales in Dollars / Sale price per unit
			= 1,003,333 / 37.90
			= 26,473