I need someone to explain this to me before I lose my mind. Every number I put i
ID: 2473615 • Letter: I
Question
I need someone to explain this to me before I lose my mind. Every number I put in is wrong.
here is the problem:
Astro Co. sold 22,000 units of its only product and incurred a $80,000 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2016’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 $200,000. The maximum output capacity of the company is 40,000 units per year.
Compute the sales level required in both dollars and units to earn $260,000 of target pretax income in 2016 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)
Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume no income taxes will be due. (Do not round intermediate calculations. Round "per unit answers" to 2 decimal places and other answers to nearest whole dollar.)
ASTRO COMPANYContribution Margin Income Statement
For Year Ended December 31, 2015 Sales $ 990,000 Variable costs 792,000 Contribution margin 198,000 Fixed costs 262,000 Net loss $ (80,000 )
Compute the sales level required in both dollars and units to earn $260,000 of target pretax income in 2016 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)
Sales level required in dollars Choose Numerator: / Choose Denominator: = Sales dollars required Fixed costs plus pretax income / Contribution margin ratio = Sales dollars required 60.00% = $0 Sales level required in units Choose Numerator: / Choose Denominator: = Sales units required Fixed costs plus pretax income / Contribution margin per unit = Sales units required $27.00 = 1 unitsExplanation / Answer
Sales level required to earn pre-tax income of $ 260,000:
Sales level required in dollars = Fixed costs + Target pre-tax income / Contribution margin ratio = $ (462,000 + $ 260,000) / 60% = $ 1,203,333
Sales level required in units = Fixed costs + Target pre-tax income / Contribution margin per unit = $ 722,000 / $ 27 = 26,741 units
Contribution margin income statement
Workings:
Selling price per unit = $ 990,000 / 22,000 = $ 45
Variable cost per unit = $ 792,000 / 22,000 x 50% = $ 18
Contribution margin per unit = Selling price per unit - Variable costs per unit = $ 45 - $ 18 = $ 27
Contribution margin ratio = Contribution margin per unit / Selling price per unit x 100 = $ 27 / $ 45 x 100 = 60%
Fixed costs = $ 262,000 + $ 200,000 = $ 462,000
$ Sales 1,203,333 Variable costs 481,338 Contribution margin 721,995 Fixed costs 462,000 Pre-tax income 260,000 approx.