Question

Problem 18-4A Break-even analysis; income targeting and forecasting C210 A P2 Astro 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 2020'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 $200,000. The maximum output capacity of the company is 40,000 units per year. Contribution Margin Income Statement For Year Ended December 31, 2019 Sales $1,000,000 Variable costs 800,000 Contribution margin 200,000 Fixed costs 250,000 Net loss $ (50,000) Required 1. Compute the break-even point in dollar sales for 2019. 2. Compute the predicted break-even point in dollar sales for 2020 assuming the machine is installed and there is no change in the unit selling price. 3. Prepare a forecasted contribution margin income statement for 2020 that shows the expected results with the machine Installed. Assume that the unit selling price and the number of units sold will not change, and no income taxes will be due. Check (3) Net income, $150,000 4. Compute the sales level required in both dollars and units to earn $200,000 of target pretax income in 2020 with the machine installed and no change in unit sales price. Round answers to whole dollars and whole units. (4) Required sales, $1,083,333 or 21,667 units (both rounded) 5. Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume no income taxes will be due.

Answer 1

Given in 2019

fixed expenses = 250000

selling price per unit= 1000000/20000 = 50                              

variable cost per unit = 80000/20000    = 40

Contribution per unit = 50-40 = 10          

     contribution margin ratio = ( contribution / sales )*100

                                                 = (10/50) *100 = 20%

1 breakeven

in dollar sales =    fixed cost / contribution margin ratio = 250000/20% = 1250000

Problem 2

Given in 2020 after machine installed

fixed expenses = 250000 + 200000 = 450000

selling price per unit= 1000000/20000 = 50                              

variable cost per unit = 40-50% = 20

Contribution per unit = 50-20 = 30          

     contribution margin ratio = ( contribution / sales )*100

                                                 = (30/50) *100 = 60%

breakeven 2020

in dollar sales =    fixed cost / contribution margin ratio = 450000/60% = 750000

In units = 750000/50 = 15000

problem 3

Marginal Income statement for year 2020
	At break even sales
	Particulars	units	price per unit	Total
	sales	15000	50	750000
less ;	variable cost	15000	20	300000
	contribution			450000
less ;	Fixed cost			450000
	Net operating income			0

problem 4

Units to be sold to earn required profit =   (fixed cost + required profit ) / contribution per unit

      =       ( 450000+200000)/30

      =           21666.66 units = 21667 units

       In sales = (fixed cost + required profit ) / contribution margin ratio

                    =           650000/60%

                     = 1083333.33 $

problem -5
Marginal Income statement for year 2020
	Particulars	units	price per unit	Total
	sales	21667	50	1083350
less ;	variable cost	21667	20	433340
	contribution			650010
less ;	Fixed cost			450000
	Net operating income			200010