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

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

Astro Co. sold 15,000 units of its only product and incurred a $40,000 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2014’s activities, the production manager notes that variable costs can be reduced 30% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $460,000. The maximum output capacity of the company is 40,000 units per year.

Compute the predicted break-even point in dollar sales for year 2014 assuming the machine is installed and there is no change in the unit sales price.

Astro Co. sold 15,000 units of its only product and incurred a $40,000 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2014’s activities, the production manager notes that variable costs can be reduced 30% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $460,000. The maximum output capacity of the company is 40,000 units per year.

Explanation / Answer

Sales price per unit = 1200000/15000= 80 Variable cost per unit =960000/15000= 64 New Variable cost per unit = 64*0.7= 44.8 CM ratio = (80-44.8)/80= 44% Break-even point in dollar sales = Fixed costs/CM ratio = (280000+460000)/44%= 1681818

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