Astro Co. sold 20,500 units of its only product and Incurred a $67.750 loss (ign
ID: 2461881 • Letter: A
Question
Astro Co. sold 20,500 units of its only product and Incurred a $67.750 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2016s 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 $155.000. The maximum output capacity of the company is 40.000.
Astro Company
Contribution Margin Income Statement
For year Ended December 31,2015.
1) Computer the break even point in dollars sa.les for year 2015.
2) Computer the predicted break even point in dollar sales for year 2016 assuming the machine is installed and is no change in the unit selling price.
3) Computer the sales level required in both dollars and units to earn $250,000 of target pretax income in 2016 with the machine installed and no change in unit sales price.
Astro Company
Contribution Margin Income Statement
For year Ended December 31,2015.
Sales $779,000 Variable costs 584,250 Contribution Margin 194,750 Fixed costs 262,500 Net loss $(67,750)Explanation / Answer
1. Break Even Point sales means sales which could recover the entire fixed costs and leaves the firm to stand in no profit and no loss situation:
Fixed costs incurred during the year = 262500
Contribution per unit = Sales price per unit - Variable cost per unit
Sales price per unit = $ 779000 / 20500
= $ 38
Variable cost per unit = $ 584250 / 20500
= $ 28.50
Contribution per unit = $38 - $ 28
= $ 9.50
Total number of units sold to break even = Fixed cost / contribution per unit
= 262500 / 9.50
= 27632 units
2. Predicted Break Even sales for the Year 2016 by installing machine:
(a) Variable cost per unit for the year 2016:
Variable cost per units as in 2015 is = $28.50 (Total variable costs/ number of units sold) (i.e. 584250 / 20500)
Less: savings 40% by installing machine = $11.40 (28.50*40%)
Net variable cost per unit = $ 17.10
(b) Contribution per unit = sales per unit - variable cost per unit
= $ 38 - $ 17.10
= $ 20.90
(c) Fixed costs for the year 2016:
Fixed costs for the year 2015 = $ 262500
Add: Incremental annual fixed costs = $ 155000
Total fixed costs = $ 417500
Break even sales for the year 2016 = Total fixed cost / Contribution per unit
= 417500 / 20.90
= 19976 units
3. Sales level required to earn $ 250,000 both in dollars and units
Gross contribution = fTotal ixed costs and target pretax income of 2016.
= $ 417500 + $ 250000
= $ 667500
No of units to earn $ 250000 = Gross contribution / contribuition per unit
= 667500 / 20.90
= 31938 units
Total sale level to earn $ 250000 = No of units X sales price per unit
= 31938 X 38
= $ 1213637
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