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

Question

Rivera Co. sold 20,000 units of its only product and incurred a $50,000 loss (ignoring taxes) for the cur- rent year, as shown here. During a planning session for year 2018'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 S capacity of the company is 40,000 units per year. inc 50,000. The maximum output fore C2 RIVERA COMPANY Contribution Margin Income Statement For Year Ended December 31, 2017 Sales Variable costs $750,000 600,000 150,000 200,000 Fixed costs.. Required 1. Compute the break-even point in dollar sales for year 2017. 2. Compute the predicted break-even point in dollar sales for year 2018 assuming the machine is installed and no change occurs in the unit selling price. (Round the change in variable costs to a whole number.) 3. Prepare a forecasted contribution margin income statement for 2018 that shows the expected results 4. Compute the sales level required in both dollars and units to earn $200,000 of target pretax income in 5. Prepare a forecasted contribution margin income statement that shows the results at the sales level Check with the machine installed. Assume that the unit selling price and the number of units sold will not $100s change, and no income taxes will be due. 2018 with the machine installed and no change in unit sales price. (Round answers to whole dollars $916.6 and whole units.) both r computed in part 4. Assume no income taxes will be due

Explanation / Answer

1. Breakeven point= Fixed Costs/ PV Ratio

PV Ratio = Contribution/sales *100

PV ratio= 150000/750000*100=20%

Breakeven point in $ sales =$200000/20%=$1000000

2. Unit selling price=$750000/20000=$37.5

Variable cost per unit= $600000/20000=$30

Now by installing the machine variable cost=$15 and fixed costs= $350000

PV ratio= ($37.5-$15)/$37.5*100=60%

{Contribution per unit/Selling price per unit*100}

Breakeven point in $ sales =$350000/60%=$583333

3. Sales : $37.5*20000=$750000

Variable costs: $15*20000=$300000

Contribution: $450000

Fixed costs: $350000

Net profit: $100000

4. Target profit= $200000

So sales level required= (fixed cost+ target profit)/ PV ratio

=($350000+$200000)/60%=$916667

Units to be sold= $916667/$37.5=24444(approx)

5. Sales: $37.5*24444=$916660 (rounded off)

Variable costs: $15*24444=$366660

Contribution: $550000

Fixed costs: $350000

Profit: $200000

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