Question

Astro Co. sold 20,600 units of its only product and incurred a $55,028 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 $156,000. 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		$	784,860
Variable costs			627,888
Contribution margin			156,972
Fixed costs			212,000
Net loss		$	(55,028	)
4. Compute the sales level required in both dollars and units to earn $260,000 of target pretax income in 2018 with the machine installed and no change in unit sales price. (Do not round intermediate calculations. Round your answers to 2 decimal places. Round "Contribution margin ratio" to nearest whole percentage)

Answer 1

4
Sales level required in dollars
Fixed costs plus pretax income / Contribution margin ratio = Sales Dollars required
628000 / 60%= $1046667
Sales level required in units
Fixed costs plus pretax income / Contribution margin per unit = Sales Units required
628000 / 22.86 = 27472 units
Workings:
Unit sales price = 784860/20600 = $38.10
Unit variable cost =(627888/20600)*50% = $15.24
Unit contribution margin = 38.10-15.24 = $22.86
Contribution margin ratio = 22.86/38.10 = 60%
Fixed costs = 212000+156000 = $368000
Fixed costs plus pretax income = 368000+260000 = $628000