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In: Advanced Math

Blue Company sold 30,000 units of its only product and incurred a $85,000 loss (ignoring taxes)...

Blue Company sold 30,000 units of its only product and incurred a $85,000 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2020’s activities, the production manager notes that variable costs can be reduced 25% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $175,000. The maximum output capacity of the company is 55,000 units per year. Blue Company Contribution Margin Income Statement For Year Ending December 31, 2019 Sales $900,000 Variable $680,000 Contribution Margin $220,000 Fixed Cost $305,000 Net Loss $(85,000) Compute the break-even point in dollar sales for year 2019. (Round your answers to 2 decimal places.) Compute the predicted break-even point in dollar sales for year 2020 assuming the machine is installed and there is no change in the unit selling price. (Round your answers to 2 decimal places.)

Solutions

Expert Solution

1) Compute the break-even point in dollar sales for year 2019.

sales price per unit =900,000 / 30,000 = $30
variable cost per unit =680,000 / 30,000 = $22.67

Contribution Per Unit= sales price per unit - variable cost per unit =$30-$22.67=$7.33

Contribution Margin Ratio= Contribution Per Unit/ sales price per unit x 100

                                       =7.33/30 x 100

                                      =24.43

Break even Point sales in $= Fixed Cost/ Contribution Margin Ratio

                                =305,000/24.43%

                                =$1,248,465

2) Compute the predicted break-even point in dollar sales for year 2020 assuming the machine is installed and there is no change in the unit selling price.

Revised Variable Cost= $22.67 x 75%=$17

Contribution Per Unit= sales price per unit - variable cost per unit =$30-$17=$13

Contribution Margin Ratio= Contribution Per Unit/ sales price per unit x 100

                                       =13/30 x 100

                                      =43.33%

Revises Fixed Cost= $305,000+$175,000 = 480000

Break even Point sales in $= Fixed Cost/ Contribution Margin Ratio

                                =480,000/43.33%

                                =$ 1,107,777

Colby Messinger answered 1 year ago
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