NOTE: For all problems, round percentages to 2 decimal places and currency to nearest dollar.

SHOW YOUR CALCULATIONS AND ALL PERTINENT STEPS TO SOLVE THE PROBLEM, PLEASE.

Iron Company is analyzing two alternative methods of producing its product. The production manager believes that variable costs can be reduced 50% by installing a machine that automates production, but fixed costs would increase. Alternative 1 shows costs before installing the machine; Alternative 2 shows costs after the machine is installed.

a. Compute the break-even point in units and dollars for both alternative.

b. Prepare a forecasted income statement for both alternatives assuming that 30,000 units will be sold. The statements should report sales, total variable costs, contribution margin, fixed costs, income before taxes, income taxes, and net income.

c. What dollar amount of sales would be necessary to achieve a pre-tax net income of $250,000 for both alternatives?

d. Which alternatives would you recommend and why?

	Alternative 1	Alternative 2
Selling price per unit	$ 45	$ 45
Variable costs per unit	$ 28	$ ?
Fixed costs	$ 230,000	$ 248,000
Income tax rate	30 %	30 %

Answers:

A.

Alternative 1		Alternative 2
Break-even sales in units: $230,000 / (45 28) =	13,530	Break-even sales in units:
Break-even sales in dollars:		Break-even sales in dollars:

B. Forecasted Income Statement assuming 30,000 units will be sold:

Alternative 1		Alternative 2
Sales		Sales
Variable Costs		Variable Costs
Contribution Margin		Contribution Margin
Fixed Costs		Fixed Costs
Income before taxes		Income before taxes
Income taxes		Income taxes
Income		Income

C. Computing Sales for:

Alternative 1		Alternative 2
Sales in dollars needed to generate pre-tax income of $250,000 =		Sales in dollars needed to generate pre-tax income of $250,000 =

D. Which alternative would you recommend and why?