# Question

Rivera Co. sold 20,000 units of its only product and incurred a $50,000 loss (ignoring taxes) for the cur-rent 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 $150,000. The maximum output capacity of the company is 40,000 units per year.

RIVERA COMPANY

Contribution Margin Income Statement

For Year Ended December 31, 2013

Sales . . . . . . . . . . . . . . . . . . . . . . $ 750,000

Variable costs . . . . . . . . . . . . . . . 600,000

Contribution margin . . . . . . . . . 150,000

Fixed costs . . . . . . . . . . . . . . . . . 200,000

Net loss . . . . . . . . . . . . . . . . . . . $ (50,000)

Required

1. Compute the break- even point in dollar sales for year 2013.

2. Compute the predicted break- even point in dollar sales for year 2014 assuming the machine is installed and no change occurs in the unit sales price. (Round the change in variable costs to a whole number.)

3. 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.

4. Compute the sales level required in both dollars and units to earn $ 140,000 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%. (Round sales in dollars to whole dollars and round sales in units to the next whole unit.)

5. 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%.

RIVERA COMPANY

Contribution Margin Income Statement

For Year Ended December 31, 2013

Sales . . . . . . . . . . . . . . . . . . . . . . $ 750,000

Variable costs . . . . . . . . . . . . . . . 600,000

Contribution margin . . . . . . . . . 150,000

Fixed costs . . . . . . . . . . . . . . . . . 200,000

Net loss . . . . . . . . . . . . . . . . . . . $ (50,000)

Required

1. Compute the break- even point in dollar sales for year 2013.

2. Compute the predicted break- even point in dollar sales for year 2014 assuming the machine is installed and no change occurs in the unit sales price. (Round the change in variable costs to a whole number.)

3. 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.

4. Compute the sales level required in both dollars and units to earn $ 140,000 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%. (Round sales in dollars to whole dollars and round sales in units to the next whole unit.)

5. 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%.

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