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

Question

Astro 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 2014'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 $200,000. The maximum output capacity of the company is 40,000 units per year. ASTRO COMPANY Contribution Margin Income Statement For Year Ended December 31, 2013 Sales Variable costs $1,000,000 800,000 Contribution margin Fixed costs 200,000 250,000 Net loss $ (50,000)

Explanation / Answer

Break even point in sales dollar for year 2013

Break even sales unitx price per unit

Break even sales unit =Fixed cost /seling price -variable cost = 250000/50-40 =25000 units x50 =$1250000

Break even point in sales dollar for year 2014

Break even sales unitx price per unit

Break even sales unit =Fixed cost /seling price -variable cost = 250000+200000/50-20 =15000 units x50 =$750000

Contribution MArgin Income Statement-2014

Per unit cost Current Sales 1000000/20000 = $50 per unit Variable cost 800000/20000 = $40 per unit Contribution Margin sales -Variable cost =50-40 =$ 10 per unit Contribution margin ratio Contribution Margin per unit/sales price per unit = 10/50 = 0.2 Break even point in dollar sales

Break even sales unitx price per unit

Break even sales unit =Fixed cost /seling price -variable cost = 250000/50-40 =25000 units x50 =$1250000

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