Question

Astro Co. sold 20,900 units of its only product and incurred a $71,860 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 40% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $159,000. 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 $ 802,560 Variable costs 601,920 Contribution margin 200,640 Fixed costs 272,500 Net loss $ (71,860 ) 2. Compute the predicted break-even point in dollar sales for year 2018 assuming the machine is installed and there is no change in the unit selling price. (Round your answers to 2 decimal places.)

Answer 1

Answer- The predicted break-even point in dollar sales for year 2018 assuming the machine is installed and there is no change in the unit selling price = $784545.45

Explanation- Break-even point in dollar sales = Fixed costs/ Contribution margin ratio

= ($272500+$159000)/55%

= $431500/55%

= $784545.45

Where- Selling price per unit = $802560/20900 units

= $38.40 per unit

Variable costs per unit = $601920/20900 units

= $28.80 per unit

Variable cost per unit in year 2018 = $28.80 per unit*(1.00 - .40)

= $17.28 per unit

Contribution margin per unit = Selling price per unit - Variable costs per unit

= $38.40 per unit - $17.28 per unit

= $21.12 per unit

Contribution margin ratio = (Contribution margin per unit/ Selling price per unit)*100

= ($21.12 per unit/$38.40 per unit)*100

= 55%