Problem 21-4A Break-even analysis; income targeting and forecasting LO C2, P2, A1

1.Astro co. sold 19,100 units of its only product and incurred a $63,282 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2016s 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 $141,000. The maximum output capacity of the company is 40,000 units per year. (show how)

Astro Company

Contribution Margin income statement

For year ended december 31,2015

Sales $699,060

Variable costs $489,342

Contribution margin $209,718

Fixed costs $ 273,000

Net loss $ (63,282)

Part 1

Complete the break-even point in dollar sales for year 2015.

Contribution margin per unit Current

A.

B.

Contribution Margin Ratio

numerator/Denominator: = contribution margin ratio

Break-even point in dollars sales:

numerator/denominator: = Break-even point in dollars

A.

B

Part 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.

Contribution margin per unit Proposed

A.

B.

Contribution Margin Ratio

numerator/Denominator: = contribution margin ratio

Break-even point in dollars sales:

numerator/denominator: = Break-even point in dollars

A.

B

Part 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.

Astro Company

Forecasted contribution margin income statement

For year ended december 31, 2016

A.

B.

Contribution margin

C.

D.

Part 4

Compute the sales level required in both dollars and units to earn $110,00 of target pretax income in 2016 with the machine installed and no change in unit sales price.

Sales level required in dollars

numerator / denominator = sales dollars required

A.

B.

Sales level required in units

numerator/denominator= sales units required

A.

B.

Part 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.

Astro Company

Forecasted contribution Margin income statement

For year ended december 31,2016

1. $per unit $

2. $ 36.60

3. Contribution margin

Part 6

A companys product sells at $12.04 per unit and has a $5.06 per unit variable cost. The companys total fixed costs are 97,800. The contribution Margin per unit is : (show how)

Part 7

Brown Companys contribution margin ratio is 36%. Total fixed costs are 147,600. What is browns break-even point in sales dollars?

Part 8

Conan Company has total fixed costs of 112,500. Its product sells for $36per unit and variable costs amount to $16 per unit. Next year conan Company wishes to earn a pretax income that equals 20% of fixed costs. How many units must be sold to achieve this target income level? (show how)

2. Tamar Co. manufactures a single product in one department. All direct materials are added at the beginning of manufacturing process. Conversion costs are added evenly throughout the process. During may, the company completed and transferred 28,700 units of product to finished goods inventory. Its 4,300 units of beginning work in process consisted of of $21,100 of direct materials and $280,440 of conversion costs. It has 3,050 units(100% complete with respect to direct materials and 80% complete with respect to conversion) in process at month-end. During the month, $550,400 of direct material costs and $2,709,000 of conversion costs were changed to production.

Part 1

Prepare the companys process costs summary for May using the weighted-average method.

Part 2

Prepare journal entries