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Required information Problem 18-3A (Static) Break-even analysis; income targeting and strategy LO C2, A1, P2 [The following information applies to the questions displayed below.] Astro
Required information Problem 18-3A (Static) Break-even analysis; income targeting and strategy LO C2, A1, P2 [The following information applies to the questions displayed below.] Astro Company sold 20,000 units of its only product and reported income of $25,000 for the current year. During a planning session for next year'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 $241,000. The selling price per unit will not change. ASTRO COMPANY Contribution Margin Income Statement For Year Ended December 31 Sales ($50 per unit) Variable costs ($40 per unit) Contribution margin Fixed costs Income $ 1,000,000 800,000 200,000 175,000 $ 25,000 1. Compute the break-even point in dollar sales for next year assuming the machine is installed. > Answer is complete but not entirely correct. Contribution Margin Per Unit Proposed Sales $ 50 Per unit Variable costs 20 Per unit Contribution margin $ 30 Per unit Contribution Margin Ratio Numerator: Contribution margin per unit $ Denominator: Selling price per unit 10 X/ $ 50 = Break-Even Point in Dollar Sales with New Machine: Numerator: Total fixed costs $ Contribution Margin Ratio Contribution margin ratio 20% Denominator: Break-Even Point in Dollars Contribution margin ratio = Break-even point in dollars 5 / 20% = $ 25
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