Question

Astro Co. sold 20,700 units of its only product and incurred a $83,778 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 $157,000. 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		$	790,740
Variable costs			553,518
Contribution margin			237,222
Fixed costs			321,000
Net loss		$	(83,778	)

Part 1. Compute the sales level required in both dollars and units to earn $270,000 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)

Sales level required in dollars Choose Numerator: / Choose Denominator: = Sales dollars required / = Sales dollars required 0 Sales level required in units Choose Numerator: / Choose Denominator: = Sales units required / = Sales units required 0

Part 2. 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 Forecasted Contribution Margin Income Statement For Year Ended December 31, 2018 $ Per Unit $ $38.20 Contribution margin 0 0

Answer 1

Answer:-Part 1)- Dollar sales required to earn profit of $270000=Fixed cost+ Desired profit/ Contribution margin ratio

={($321000+$157000)+$270000}/65%

=( $478000+$270000)/65%

=$1150769

Part2)- Unit sales required to earn profit of $270000=Fixed cost+ Desired profit/ Contribution margin per unit

={($321000+$157000)+$270000}/ $24.83 per unit

=( $478000+$270000)/$24.83 per unit

=30125 units

Explanation:-

Selling price per unit =$790740/20700 units =$38.20 per unit

Variable cost per unit =$553518/20700 units =$26.74 per unit

Variable cost per unit in 2018 = $26.74 per unit*50% =$13.37 per unit

Contribution margin per unit in 2018= Selling price per unit- Variable cost per unit

=$38.20 per unit-$13.37 per unit

= $24.83 per unit

Contribution margin ratio =( Contribution margin per unit/ Selling price per unit)*100

=($24.83 per unit/$38.20 per unit)*100

=65%

Part-2)-

Astro Co.
Contribution Margin statement
Particulars		Amount
		$
Sales		1150769
Less:-Variable costs:-	$1150769*35%	402769
Contribution Margin	$1150769*65%	748000
Less:- Fixed Costs	$321000+$157000	478000
Net Operating Income		270000