Astro Co. sold 19,300 units of its only product and incurred a $54,940 loss (ign

Question

Astro Co. sold 19,300 units of its only product and incurred a $54,940 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2016'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 $143,000. The maximum output capacity of the company is 40,000 units per year. ASTRO COMPANY Contribution Margin Income Statement For Year Ended December 31, 2015 Sales Variable costs $710,240 532,680 Contribution margin Fixed costs 177,560 232,500 Net loss $(54,940)

Explanation / Answer

Solution:

2) Break Even Point in dollars (2016)

Selling Price per Pair (No change from old price) = $36.80

Old Variable Cost Per pair = $27.60

New Variable Cost per Pair (after reduction of 40%) = $27.60 – ($27.60 x 40%) = $27.60 - $11.04 = $16.56 per pair

Contribution Margin per pair = Selling Price – Variable Cost = $36.80 - $16.56 = $20.24

Contribution Margin Ratio = Contribution margin / Selling price per pair = $20.24 / $36.80 x 100 = 55%

New Fixed Cost = $232,500 + $143,000 = $375,500

Break Even Point in dollars = Fixed Cost / Contribution margin ration = $375,500 / 55% = $682,727.27

Break Even Point in dollars for 2016 = $682,727.27

3) Forecasted Contribution margin income statement for 2016

ASTRO COMPANY

Forecasted Contribution Margin Income Statement

For Year Ended December 31, 2016

Sales (19,300 x $36.80)

$710,240

Variable Cost (19,300 x $16.56)

$319,608

Contribution Margin

$390,632

Fixed Costs

$375,500

Income before taxes

$15,132

4)

Sales Level required in dollars to earn $130,000 of target pretax income in 2016 = (Total Fixed Cost + Target Income) / Contribution margin ratio

= ($375,500 + $130,000) / 55%

= $505,500 / 55%

= $919,090.91

Sales Level required in units to earn $130,000 of target pretax income in 2016 = (Total Fixed Cost + Target Income) / Contribution margin per unit

= ($375,500 + $130,000) / $20.24

= $505,500 / $20.24

= 24,975.30 Units

5)

Forecasted Contribution Margin Income Statement that shows the result at the sales level computed in part 4.

ASTRO COMPANY

Forecasted Contribution Margin Income Statement

For Year Ended December 31, 2016

$ Per Unit

$

Sales (24,975.30 Units)

$36.80

$919,091

Variable Cost (24,975.30 Units)

$16.56

$413,591

Contribution Margin

$20.24

$505,500

Fixed Costs

$15.03

$375,500

Income before taxes

$5.21

$130,000

ASTRO COMPANY

Forecasted Contribution Margin Income Statement

For Year Ended December 31, 2016

Sales (19,300 x $36.80)

$710,240

Variable Cost (19,300 x $16.56)

$319,608

Contribution Margin

$390,632

Fixed Costs

$375,500

Income before taxes

$15,132

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