Noru Co. sold 30,000 units of its only product and incurred a $75,000 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2010’s activities, the production manager notes that variable costs can be reduced 40% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $220,000. The maximum output capacity of the company is 50,000 units per year.
NORU COMPANY
Contribution Margin Income Statement
For Year Ended December 31, 2009
Sales . . . . . . . . . . . . . . . . . . . $1,125,000
Variable costs . . . . . . . . . . . . 900,000
Contribution Margin . . . . . . . 225,000
Fixed costs . . . . . . . . . . . . . . 300,000
Net loss . . . . . . . . . . . . . . . . $ (75,000)
Required
1. Compute the break-even point in dollar sales for year 2009.
2. Compute the predicted break-even point in dollar sales for year 2010 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 2010 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 $104,000 of after-tax income in 2010 with the machine installed and no change in the unit sales price. Assume that the income tax rate is 20%.
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 20%.