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) tor the current year as shown here. During a planning session tor year 2016'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. Compute the break-even point in dollar sales for year 2015.

Explanation / Answer

Break even point in units=Fixed cost/Contribution margin per unit

Contribution margin=Sales-Variable cost

Sales=1000000

Variable cost=800000

Contribution margin=1000000-800000=200000

Contribution margin per unit=200000/20000=$10 per unit

Contribution margin ratio=Contribution margin as % of sales=Contribution margin/Sales *100=200000/1000000*100=20%

Break even point in units=Fixed cost/Contribution per unit=250000/10=25000 units

Break even point in sales=Break even in units * Selling price=25000*50=$1250000

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