[The following information applies to the questions displayed below] Jetson Co.

Question

[The following information applies to the questions displayed below] Jetson 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 2012'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 $150,000. The maximum output capacity of the company is 40,000 units per year JETSON COMPANY Contribution Margin Income Statement For Year Ended December 31, 2011 Sales Variable costs $750,000 600,000 Contribution margin Fixed costs 150,000 200,000 Net loss $ (50,000) value: 10.00 points Required Required

Explanation / Answer

1 Contribution margin ratio = 150000/750000 = 20% Break even point in dollars = Fixed costs/Contribution margin ratio = 200000/20%=1000000 2 Contribution margin ratio =(750000-300000)/750000 = 60% Break even point in dollars = Fixed costs/Contribution margin ratio =(200000+150000)/60%=583333 3 Sales 750000 variable costs 300000 Contribution margin 450000 Fixed costs 350000 Net income 100000 4 Before tax income = 140000/(1-0.3)= 200000 Sales level required in dollars = (350000+200000)/60%= 916667 Sales level required in units = 916667/37.5= 24444 5 Sales 916667 Variable costs 366667 Contribution margin 550000 Fixed costs 350000 Income before income taxes 200000 Income taxes 60000 Net income 140000

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