Question

Problem 18-4A Break-even analysis; income targeting and forecasting LO C2, P2, A1 [The following information applies to the questions displayed below.] Astro Co. sold 19,800 units of its only product and incurred a $48,292 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 50% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $148,000. 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 $ 738,540, Variable costs 590,832, Contribution margin 147,708, Fixed costs 196,00,0 Net loss $ (48,292 ).

Problem 18-4A Part 1 Required: 1. Compute the break-even point in dollar sales for year 2017. (Round your answers to 2 decimal places.)

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. (Round your answers to 2 decimal places.)

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 the nearest whole dollar.)

4. Compute the sales level required in both dollars and units to earn $180,000 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)

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.)

*PLEASE SHOW ALL PARTS*

Answer 1

1) Units sold in 2017 = 19,800 units

Contribution margin per unit = Contribution margin/Units sold

= $147,708/19,800 units = $7.46 per unit

Fixed costs in 2017 = $196,000

Break Even Point (in units) = Fixed costs/Contribution margin per unit

= $196,000/$7.46 = 26,273.46 units

Selling Price per unit = Sales/Units sold

= $738,540/19,800 units = $37.30 per unit

Break Even point (in dollars) = Break even units*Selling price per unit

= 26,273.46 units*$37.30 per unit = $980,000

2) Curent Varaible cost per unit = Selling Price per unit - Contribution margin per unit

= $37.30 - $7.46 = $29.84

New variable cost per unit = $29.84*50% = $14.92

New Fixed cost = $196,000+$148,000 = $344,000

New Contribution margin per unit = Selling Price per unit - New variable cost per unit

= $37.30 - $14.92 = $22.38

Break Even Point (in units) = Fixed costs/Contribution margin per unit

= $344,000/$22.38 = 15,370.87 units

Break Even point (in dollars) = Break even units*Selling price per unit

= 15,370.87 units*$37.30 per unit = $573,333.45

3) Forecasted contribution margin income statement for 2018 (Amount in $)

Sales (19,800 units*$37.30 per unit)	738,540
Less: Variable costs (19,800 units*$14.92 per unit)	(295,416)
Contribution Margin	443,124
Less: Fixed costs	(344,000)
Net Income	99,124

4) Required Contribution = Fixed costs+Required net income

= $344,000+$180,000 = $524,000

New contribution per unit = $37.30 - $14.92 = $22.38

Contribution margin ratio = ($22.38/$37.30)*100 = 60%

Required sales in $ = Required contribution/contribution margin ratio

= $524,000/60% = $873,333.33

Required sales in units = Required sales in dollars/Selling price per unit

= $873,333.33/$37.30 = 23,413.76 units

5) Forecasted contribution margin income statement for 2018 (Amount in $)

Sales (23,413.76 units*$37.30 per unit)	873,333.33
Less: Variable costs (23,413.76 units*$14.92 per unit)	(349,333.33)
Contribution Margin	524,000
Less: Fixed costs	(344,000)
Net Income	180,000