Question

Required information Problem 05-4A Break-even analysis; income targeting and forecasting LO C2, P2, A1 [The following information applies to the questions displayed below.] Astro Co. sold 19,200 units of its only product and incurred a $43,072 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 50% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $142,000. The maximum output capacity of the company is 40,000 units per year. ASTRO COMPANY Contribution Margin Income Statement For Year Ended December 31, 2019 Sales $ 704,640 Variable costs 563,712 Contribution margin 140,928 Fixed costs 184,000 Net loss $ (43,072 )

Problem 05-4A Part 5 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.) Target pre income is 446000

Answer 1

	Current
Sales per unit ( 704,640 / 19,200 )	36.70
Variable cost per unit ( 563712 / 19,200 )	29.36

Revised variable cost per unit = Current variable cost per unit * ( 1 - % reduction ) = 29.36 * ( 1 - 50% )

14.68

ASTRO COMPANY
Forecasted Contribution margin income statement
For year ended December 31, 2018
Sales ( 36.70* 19,200 )	704,640
Variable cost ( 14.68 * 19,200 )	281,856
Contribution margin	422,784
Fixed costs ( 184,000 + 142,000 )	326,000
Net income	96,784

When machine is installed :
Contribution margin per unit = Contribution margin / Units sold = 422,784 / 19,200	22.02
Contribution margin ratio = Contribution margin per unit / Sales per unit = 22.02 / 36.70	60%

Sales level required in dollars
	Choose numerator :	/	Choose denominator:	=	Sales dollars required
	Fixed costs plus pretax income	/	Contribution margin ratio	=	Sales dollars required
	772,000 (326,000+446000)	/	60%	=	1,286,667
Sales level required in units
	Choose numerator :	/	Choose denominator:	=	Sales units required
	Fixed costs plus pretax income	/	Contribution margin ratio	=	Sales units required
	772,000	/	22.02	=	35,059

Required 5 :
ASTRO COMPANY
Forecasted Contribution margin income statement
For year ended December 31, 2020
	$ Per unit	$
Sales	36.70	1,286,667
Variable cost [1,286,667/36.70*14.68]	14.68	514,667
Contribution margin	22.02	772,000
Fixed costs		772,000
Net income		0

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