Astro Co – Breakeven analysis

Astro Co – Breakeven analysis

Astro Co. sold 23,000 units of its only product and incurred a $57,000 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2014’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 $210,000. The maximum output capacity of the company is 40,000 units per year.

 

ASTRO COMPANY

Contribution Margin Income Statement

For Year Ended December 31, 2013

  Sales $1,035,000  
  Variable costs  828,000  
      
  Contribution margin  207,000  
  Fixed costs  264,000  
      
  Net loss $(57,000) 
      
2. Compute the break-even point in dollar sales for year 2013.

  
 
 Per unit costs: Current   
 Sales   
 Variable costs  
 Contribution margin $0.00
Contribution margin ratio
 Choose Numerator:/Choose Denominator:=Contribution margin ratio
  / =Contribution margin ratio
     0 
Break-even point in dollar sales:
 Choose Numerator:/Choose Denominator:=Break-even point in dollars
  / =Break-even point in dollars
     0

3. Compute the predicted break-even point in dollar sales for year 2014 assuming the machine is installed and there is no change in the unit sales price.

  
 
 Per unit costs: Proposed   
 Sales $1,035,000.00 
 Variable costs  
 Contribution margin $1,035,000.00
Contribution margin ratio
 Choose Numerator:/Choose Denominator:=Contribution margin ratio
  / =Contribution margin ratio
     0 
Break-even point in dollar sales with new machine:
 Choose Numerator:/Choose Denominator:=Break-even point in dollars
  / =Break-even point in dollars
     0

4. 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 due.

  
 
ASTRO COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2014
  
  
Contribution margin0
  
 $0

5. Compute the sales level required in both dollars and units to earn $189,000 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%.

  
 
Calculation of targeted pretax income    
 Pretax income   
 Income taxes30% 
 After-tax income $189,000
Sales level required in dollars
 Choose Numerator:/Choose Denominator:=Sales dollars required
  / =Sales dollars required
     0 
Sales level required in units
 Choose Numerator:/Choose Denominator:=Sales units required
  / =Sales units required
     0 

6. 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%.

  
 
ASTRO COMPANY
Forecasted Contribution Margin Income Statement
For Year Ended December 31, 2014
 $ Per Unit$
 $45.00 
   
Contribution margin 0
   
  0
   
Net income  
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