Question

Astro Ce sold 20,000 units of its only product and incurra s0,000 loss d ringes for the current Problem 21-4A year as shown here. During a planning session for year 2014's activities, the production manager notes Breskoven analysis Income that variable can be reduced 50by Installing machine that automates several operations. To ob targeting and forcesting tal these savings, the company must increase its annual fixed costs by $200,000. The maximum output 2 2 ML capacity of the company is 40,000 units per year. ASTRO COMPANY Contribution Margin Income Statement For Year End December 31, 2011 000.000 800.0004 0 200.000 250,000 $(50.000) Check 3) Net income, $150,000 Required 1. Compute the break-even point in dollar sales for year 2013. o 2. Compute the predicted break-even point in dollar sales for year 2014 assuming the machine is in stalled and there is no change in the unit sales price. 3. Prepare a forecasted contribution margin income statement for 2014 that shows the expected results with the machine installed. Assume that the unit sales price and the number of units sold will not change, and no income taxes will be duc. 4. Compute the sales level required in both dollars and units to earn $140,000 of after-tax income in 2014 with the machine installed and no change in the unit sales price. Assume that the income tax rate is 30%. (Hint: Use the procedures in Exhibits 21.22 and 21.23.) (Round answers to whole dollars or units.) 5. Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume an income tax rate of 30%. (4) Required sales, $1,063,333 or 21,667 units

Answer 1

Part 1 Breakeven point in dollar Sales Sales = Fixed Cost Contribution $1,000,000 $250,000 $200,000 $1,250,000 Part 2 If the machine is installed: New Fixed Cost $250,000 + $200,000 $450,000 Existing Unit Sales Price = Sales Units $50.00 $1,000,000 20,000.00 New Variable Cost per unit = 50% of Existing Variable Cost Units = $800,000*50% $20.00 20,000.00 New Contribution Margin per unit = Existing Unit Sales Price - New Variable Cost per unit $50 - $20 $30 Breakeven point in dollar Sales Unit Sales Price = New Fixed Cost New Contribution per Unit $50.00 $450,000 $30 $750,000

Part 3 Forecasted Contribution Margin Statement Sales (20,000 units) Variable Cost ($20 per unit) Contributiuon Margin Fixed Cost (new) Net Income $1,000,000.00 $400,000.00 $600,000.00 $450,000.00 $150,000.00 Part 4 Desired After Tax Income $140,000.00 Tax Rate 30% Desired before Tax Income = Desired After Tax Income 100-Tax Rate $200,000.00 Fixed Costs $450,000.00 Desired Contribution = Desired before Tax Income + Fixed Costs $650,000.00 Desired dollar Sales Unit Sales Price = Desired Contribution Contribution Margin per un $1,083,333 Desired Unit Sales = Desired dollar Sales Unit Sales Price 21,667

Part 5 Forecasted Contribution Margin Statement (21,667 units) Sales (21,667 units) Variable Cost ($20 per unit) Contributiuon Margin Fixed Cost (new) Net Income before Tax Tax @ 30% Net Income after Tax $1,083,333.33 $433,340.00 $649,993.33 $450,000.00 $199,993.33 $59,998.00 $139,995.33 • $5 difference is because of rounding the units to whole number