nalysis; income targeting and forecasting LO C2, P2, A1 The following informatio
ID: 2413419 • Letter: N
Question
nalysis; income targeting and forecasting LO C2, P2, A1 The following information applies to the questions displayed below stro 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 2018's activities, the production manager notes that variable costs can be reduced 50% by installing a machine that automates several increase Its annual fixed costs by $200,000. The maximum output capacity of the company is 40,000 units per year operations. To obtain these savings, the company must ASTRO COMPANY Contribution Margin Income Statement For Year Ended December 31, 2017 $1,000, 000 sales Variable costs Contribution margin Pixed costs Net los8 800,000 200,000 250,000 $ (50,000) Problem 18-4A Part 4 4. Compute the sales level required in both dollars and units to earn $200,000 of target pretax income installed and no change in unit sales price. ales level required in dollars Choose Numerator: Choose Denominator:Sales Dollars Requ ? : - Sales dolars required required in units Choose N Choose Denominator: ator:Sales Units Requir Saies units requiredExplanation / Answer
Solution 4:
Existing selling price per unit = $1,000,000/20000 = $50 per unit
Variable cost per unit = $800,000 / 20000 = $40 per unit
Revised variable cost per unit after installing machie = $40 * 50% = $20 per unit
New contribution margin per unit = $50 - $20 = $30 per unit
New contribution margin ratio = $30 / $50 = 60%
New Fixed costs = $250,000 + $200,000 = $450,000
Target pretax income = $200,000
Target contribution margin = $450,000 + $200,000 = $650,000
Sales required in dollars to earn target pre tax income = Target contribution / Contribution margin ratio
= $650,000 / 60% = $1,083,333
Sales level required in units to earn target pre tax income = Target contribution / Contribution margin per unit
= $650,000 / $30 = 21667 units
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