Home-My SC Horne × y M Chapter 21 -) C Oezto.mheducation.com/hm.tpx McGraw-Hill

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Home-My SC Horne × y M Chapter 21 -) C Oezto.mheducation.com/hm.tpx McGraw-Hill Connect I s × N-n Course: J17FA Productio × The folowing information applies to the questions displayed below] Astro Co. sold 20,500 units of its only product and incurred a $67750 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 $155,000. The maximum output capacity of the company is 40.000 units per year ASTRO COMPANY Margin Income Statement For Year Ended December 31, 2015 $ 779.000 584.250 Varlable costs Contribution margin Fixed costs 194.750 262,500 Net loss $ (67,750)

Explanation / Answer

1) Breakeven point in dollar sales for year 2015 :

Tablular figures

2) Sales = $38 per pair

Variable costs = $17.10 per pair

Predicted variable costs per pair = $584,250 * 60% / 20,500 = $17.10

Contribution margin = $38 - $17.10 = $20.90 per pair

Contribution margin ratio = Contribution margin / sales per unit = 20.90 / 38 = 55%

2015 fixed costs plus 2016 increase = ($262,500 + $155,000) = $417,500

2016 breakeven in sales = Fixed cost / Contribution margin

= 417,500 / 55% = $759,091

3) Forecasted contribution margin income statement for 2016 -

Since, Fixed cost = $417,500

Net income = $428,450 - $417,500 = $10,950

4) Required sales in dollars = (Fixed costs + Target pretax income) / Contribution margin ratio

= $417,500 + $250,000 / 55% = $667,500 / 55% = $1,213,636

Required sales in units = Fixed costs + Target pretax income / Contribution margin per unit

= $417,500 + $250,000 / 20.90 = 31,938 units

5)Sales = 31,938 units × $38.00 = $1,213,644

Variable costs = 31,938 units × $17.10 = $546,140

Contribution margin = 31,938 units × $20.90 = $667,504

Fixed costs = 417,500

Income before taxes = 667,504 - 417,500 = $250,004

Income before income taxes is slightly greater than the targeted $250,000 income due to rounding of units.

Calculation of contribution margin ratio 25% is as below-

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