Question

Problem 18-4A Break-even analysis; income targeting and forecasting LO C2, P2, A1

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Astro Co. sold 19,400 units of its only product and incurred a $44,828 loss (ignoring 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 $144,000. The maximum output capacity of the company is 40,000 units per year.

ASTRO COMPANY Contribution Margin Income Statement For Year Ended December 31, 2017
Sales		$	715,860
Variable costs			572,688
Contribution margin			143,172
Fixed costs			188,000
Net loss		$	(44,828	)

Required: 1. Compute the break-even point in dollar sales for year 2017. (Round your answers to 2 decimal places.) Contribution Margin Per Unit Current $ 0.00 Contribution Margin Ratio Choose Choose Numerator: 1 Denominator: II Contribution Margin Ratio Contribution margin ratio 0 1 Break-Even Point in Dollar Sales: Choose Choose Numerator: 1 Denominator: II 1 Break-Even Point in Dollars Break-even point in dollars 0

Answer 1

Solution 1) Contribution Margin per unit Sales Variable cost Contribution Margin per unit Contribution Margin Ratio Current $ 36.90 $ -29.52 $ 7.38 Choose Denominator Contribution Margin Ratio Choose Numerator Contribution Margin ratio 20% Contribution pu / Sales $ 7.38 / $ 36.90 Break Even Point in Dollar Sales Choose Choose Numerator Denominator Fixed Cost / Cont per unit $ 1,88,000.00 / $ 7.38 = Contribution Margin Ratio Contribution Margin ratio 25,474 units Solution 2) Contribution Current Sales $ 36.90 Variable cost $ -14.76 Contribution Margin per unit $ 22.14 Contribution Margin Ratio Choose Choose Numerator Denominator Contribution pu 7 Sales $ 22.14 / $ 36.90 Break Even Point in Dollar Sales Choose Choose Numerator Denominator Fixed Cost 7 Cont per unit $ 3,32,000.00 / $ 22.14 Contribution Margin Ratio Contribution Margin ratio 60% Contribution Margin Ratio Contribution Margin ratio 14,995 units

Solution 3) ASTRO COMPANY Forecasted Contribution Margin Income Statement for the year ended December 31,2018 Sales (19,400 x $ 36.90) $ 7,15,860 Variable cost (19,400 x $ 14.76) $ 2,86,344 Contribution Margin $ 4,29,516 Fixed Cost $ 3,32,000 Net Income $ 97,516 Solution 4) Desired Profit Fixed Cost Target Contribution $ $ $ 1,40,000 3,32,000 4,72,000 Sales level required in dollars Choose Numerator Sales Dollars required Choose Denominator Contribution Margin % 60% Target Contribution 7 $ 4,72,000.00 7 Sales level required in units Sales Dollars required $7,86,666.67 = Choose Numerator Target Contribution $ 4,72,000.00 Choose Denominator Cont per unit $ 22.14 7 / Sales units required Contribution Margin ratio 21,319 units

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