Jetson Co. sold 20,000 units of its only product and incurred a $50,000 loss (ig

Question

Jetson Co. sold 20,000 units of its only product and incurred a $50,000 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2012 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 $150,000. The maximum output capacity of the company is 40,000 units per year.Contribution Margin Income StatementFor Year Ended December 31, 2011Sales 750000 Variable costs 600000 Contribution margin 150000 Fixed costs 200000 Net loss (50000) 1.Prepare a forecasted contribution margin income statement for 2012 that shows the expected results with the machine installed. Assume that the unit sales price and the number of units sold will not change, and no income taxes will be due. 2.Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume an income tax rate of 30%

Explanation / Answer

1. compute the break even point in dollar sales for year 2008
1,000,000 / 20,000 = $50 sales price per unit
800,000 / 20,000 = $40 variable cost per unit
250,000 + 40x = 50x
x = 25,000 units sold to break even
25,000 x $50 = $1,250,000 sales to break even.

2. compute the predicted break even point in dollar sales for year 2009 assuming the machine is in stalled and there is no change in unit sales price
450,000 + 20x = 50x
x = 15,000 units sold to break even
15,000 x $50 = $750,000 sales to break even

3. prepare a forecasted contribution margin income statement for 2009 that shows the expected results with the machine installed. Assume that the unit sales price and the number of units sold will not change and no income taxes.
Astro Company
Contribution Margin Income Statement
For Year Ended Dec. 31 2009
Sales - $1,000,000
variable costs - 400,000
contribution margin - 600,000
fixed costs - 450,000
net gain - $150,000

4. compute the sales level required in both dollars and units to earn $140,000 of after tax income in 2009 with the machine installed and no change in unit sales price. Assume the income tax rate is 30%
450,000 + 20x + (140,000 / 0.70) = 50x
x = 21,667 units
21,667 x 50 = $1,083,350
5. prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume an income tax rate of 30%.
Astro Company
Contribution Margin Income Statement
For Year Ended Dec. 312008
Sales - $1,083,350
variable costs - 433,340
contribution margin - 650,010
fixed costs - 450,000
Gross Income - 200,010
Income Tax - 60,003
Net Income - 140,007

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