Question

# Astro Co. sold 20,600 units of its only product and incurred a \$55,028 loss (ignoring taxes)...

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)

 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

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