Question

8 Required information Part 1 of 5 [The following information applies to the questions displayed below Astro Co. sold 20,000 units of ins only product and incurred a $50,000 loss (gnoring taxes) for the current 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 $200000. The maximum output capacity of the company is 40,000 units per year 1 pods ASTRO COMPANY Contribution Margin Income Statenent For Year Ended December 31, 2017 $1,000,000 8ee,e00 200,000 250,000 ellook Sales Variable costs Contribution nargin Fixed costs Pint Net loss $ (50,000) oferences

Answer 1

1)

	Contribution margin per unit		Current
	Sales		(1000000/20000)= $50	per unit
	Variable costs		(800000/20000)= 40	per unit
	Contribution margin		$10	per unit
Contribution Margin Ratio
	Choose Numerator	/	Choose Denominator	=	Contribution Margin Ratio
Contribution Margin Ratio	Contribution margin	/	Sales	=	Contribution Margin Ratio
	$10	/	50	=	20	%
Break-Even Point in Dollar Sales:
	Choose Numerator	/	Choose Denominator	=	Break-Even Point in Dollars
Break-Even Point in Dollar Sales	Fixed cost	/	Contribution margin ratio	=	Break-Even Point in Dollars
	$250000	/	20%	=	$1250000

2) New variable costs= $40-50%*40= $20

New fixed costs= $250000+200000= $450000

	Contribution margin per unit		Proposed
	Sales		(1000000/20000)= $50	per unit
	Variable costs		20	per unit
	Contribution margin		$30	per unit
Contribution Margin Ratio
	Choose Numerator	/	Choose Denominator	=	Contribution Margin Ratio
Contribution Margin Ratio	Contribution margin	/	Sales	=	Contribution Margin Ratio
	$30	/	50	=	60	%
Break-Even Point in Dollar Sales With New Machine:
	Choose Numerator	/	Choose Denominator	=	Break-Even Point in Dollars
Break-Even Point in Dollar Sales	Fixed costs	/	Contribution margin ratio	=	Break-Even Point in Dollars
	$450000	/	60%	=	$750000

3)

ASTRO COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2018
Sales (20000*$50)	$1000000
Variable costs (20000*$20)	400000
Contribution margin	600000
Fixed costs	450000
Net income (loss)	$150000

4)

Sales level required in dollars:
	Choose Numerator	/	Choose Denominator	=	Sales dollars required
	Fixed cost plus target pretax income			=	Sales dollars required
	($450000+200000)= $650000	/	60%	=	$1083333
Sales level required in units:
	Choose Numerator	/	Choose Denominator	=	Sales units required
	Fixed cost plus target pretax income	/	Contribution margin per unit	=	Sales units required
	($450000+200000)= $650000	/	30	=	21667	units

5)

ASTRO COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2018
Sales (21667*$50)	$1083350
Variable costs (21667*$20)	433340
Contribution margin	650010
Fixed costs	450000
Net income (loss)	$200010

Difference is due to rounding.