Astro Co. sold 20,000 units of its only product and incurred a $50,000 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.
ASTRO COMPANY
Contribution Margin Income Statement
For Year Ended December 31, 2015
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000,000
Variable costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000
Contribution Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (50,000)
Required
1. Compute the break-even point in dollar sales for year 2015.
2. Compute the predicted break-even point in dollar sales for year 2016 assuming the machine is installed and there is no change in the unit selling price.
3. Prepare a forecasted Contribution Margin income statement for 2016 that shows the expected results with the machine installed. Assume that the unit selling 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 $200,000 of target pretax income in 2016 with the machine installed and no change in unit sales price. Round answers to whole dollars and whole units.
5. 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.