Astro Co. sold 15,000 units of its only product and incurred a $102,000 loss (ig

Question

Astro Co. sold 15,000 units of its only product and incurred a $102,000 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2014's activities, the production manager notes that variable costs can be reduced 40% 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 ASTRO COMPANY Contribution Margin Income Statement For Year Ended December 31, 2013 Sales Variable costs $750,000 480,000 Contribution margin Fixed costs 270,000 252,000 Net loss (102.000)

Explanation / Answer

1. Break - even point in dollars for the year 2013 = Fixed cost / contribution margin %

                                                                  = $2,52,000 / 36%

                                                                  = $7,00,000

Contribution % = total contribution / sales x100

                      = $2,70,000 / $7,50,000 x 100

                      =36%

2. During 2014,

Sales                               =      $ 7,50,000

Variable cost

-$480000 x 60%                =     $ 2,88,000( 40% reduction )

Contribution Margin           =     $ 4,62,000

less: fixed cost        

existing      $2,52,000

Increase     $1,50,000

                 ---------------            $4,02,000

Net operating income             $   60,000

Break-even point = Fixed cost / contribution Margin %

                         = $ 4,02,000 / 62%

                         = $6,48,387

contribution margin % = contribution margin / sales x 100

                                 = $4,62,000 / $7,50,000 x 100

                                 = 61.6% or 62%

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