Jetson 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 2012’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 $150,000. The maximum output capacity of the company is 40,000 units per year.
JETSON COMPANY Contribution Margin Income Statement For Year Ended December 31, 2011 | |
Sales… | $750,000 |
Variable costs… | 600,000 |
Contribution margin.. | 150,000 |
Fixed costs… | 200,000 |
Net loss.. | $(50,000) |
Required
1. Compute the break-even point in dollar sales for year 2011.
2. Compute the predicted break-even point in dollar sales for year 2012 assuming the machine is installed and there is no change in the unit sales price.
3. Prepare a forecasted contribution margin income statement for 2012 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 due.
4. Compute the sales level required in both dollars and units to earn $140,000 of after-tax income in 2012 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 18.21 and 18.23.)
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%.
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