Concept explainers
Videos
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 machine that automates several operation. 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
Required
- Compute the break-even point in dollar sales for year 2015.
- 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.
- 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. - 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.
- Prepare a forested contribution margin income statement that shows the results aat the sales level computed in part 4. Assume no income taxes will be due.
Concept introduction:
Break-Even Point: The level of sales at which profits are zero refers to break-even point. In other words, it is the point where total revenue equals total cost and total contribution margin equals total fixed cost.
Contribution Margin Ratio: The ratio that indicates the percentage of sales that is available with the company to cover its fixed expenses and profit refers to contribution margin ratio. The ratio is used to determine the profits from various levels of sales.
Requirement 1:
To compute:
The break-even point in dollar sales Astro Co. for the year 2016.
Answer to Problem 4PSA
Break-even point in dollar sales of Astro Co. is $1, 250, 000.
Explanation of Solution
Break-even point in sales dollars is computed by using the formula,
Break-even point (in dollars) = Fixed Costs/Contribution Margin Ratio:
Where Contribution Margin Ratio = Contribution Margin per unit/ Sales per unit
Contribution Margin per unit = Selling price per unit-Variable cost per unit
Given,
Sales: $1, 000, 000
Sales unit: 20, 000
Selling price per unit = $1, 000, 000/20, 000 units
Selling price per unit = $50
Variable costs: $800, 000
Sales unit: 20, 000
Variable cost per unit = $800, 000/20, 000
Variable cost per unit = $40
Contribution Margin per unit is computed as in the below table:
| Contribution Margin per unit | ($) per unit. |
| Selling Price per unit | 50 |
| Less: Variable Cost per unit | (40) |
| Contribution Margin per unit | 10 |
Therefore Contribution Margin Ratio = $10/$50
Contribution Margin Ratio = 20%
Break-even point in dollars is computed by using the formula as below:
Break-even point (in dollars) = $250, 000/20%
Break-even point (in dollars) = $1, 250, 000
Concept introduction:
Break-Even Point: The level of sales at which profits are zero refers to break-even point. In other words, it is the point where total revenue equals total cost and total contribution margin equals total fixed cost.
Contribution Margin Ratio: The ratio that indicates the percentage of sales that is available with the company to cover its fixed expenses and profit refers to contribution margin ratio. The ratio is used to determine the profits from various levels of sales.
Requirement 2:
To compute:
The predicted break-even point in dollar sales for the year 2016 assuming the machine is installed and there is no change in unit selling price.
Answer to Problem 4PSA
The break-even point in dollar sales of Astro Co. after installation of machine with no change in selling price per unit would be $750, 000.
Explanation of Solution
Break-even point in sales dollars is computed by using the formula,
Break-even point (in dollars) = Fixed Costs/Contribution Margin Ratio:
Where Contribution Margin Ratio = Contribution Margin per unit/ Sales per unit
Contribution Margin per unit = Selling price per unit-Variable cost per unit
Contribution Margin per unit is computed as in the below table:
| Contribution Margin | ($) Per Unit |
| Sales | 50 |
| Less: Variable Cost | (20) |
| Contribution Margin | 30 |
Therefore Contribution Margin Ratio = $30/$50
Contribution Margin Ratio = 60%
Break-even point in dollars is computed by using the formula as below:
Break-even point (in dollars) = $450, 000/60%
Break-even point (in dollars) = $750, 000
Note 1: Annual fixed costs is increased by $200, 000 as given in the problem. So now the fixed costs would be $250, 000+$200, 000=$450, 000.
Note 2: Variable cost is reduced by 50% by installing a machine.
Concept introduction:
Break-Even Point: The level of sales at which profits are zero refers to break-even point. In other words, it is the point where total revenue equals total cost and total contribution margin equals total fixed cost.
Contribution Margin Ratio: The ratio that indicates the percentage of sales that is available with the company to cover its fixed expenses and profit refers to contribution margin ratio. The ratio is used to determine the profits from various levels of sales.
Requirement 3:
To prepare:
The forecasted contribution margin income statement for Astro Co. for the year 2016 showing the expected results with the machine installed.
Answer to Problem 4PSA
| Astro Co. Forecasted Contribution Margin Income Statement for the year 2016 | |
| Amount in $ | |
| Sales | 1, 000, 000 |
| Less: Variable costs | (400, 000) |
| Contribution Margin | 600, 000 |
| Less: Fixed costs | (450, 000) |
| Net income | 150, 000 |
Explanation of Solution
Computation of Contribution Margin:
Given,
Sales: 20, 000 units * $50 = $1, 000, 000
Variable costs: 20, 000 units * $20 = $400, 000
Contribution Margin is computed by using the formula,
Contribution Margin = Sales-Variable costs:
Contribution Margin = $1, 000, 000-$400, 000
Contribution Margin = $600, 000
Computation of Variable costs:
Sales Units: 20, 000
Variable costs: $20
Variable costs = 20, 000*$20
Variable costs = $400, 000
Note: Variable costs is reduced by 50% by installing a machine.
Computation of total fixed costs:
Fixed Costs in 2015: $250, 000
Increase in annual costs of 2016: $200, 000
Total fixed costs = $250, 000 + $200, 000
Total fixed Costs = $450, 000
Concept introduction:
Break-Even Point: The level of sales at which profits are zero refers to break-even point. In other words, it is the point where total revenue equals total cost and total contribution margin equals total fixed cost.
Contribution Margin Ratio: The ratio that indicates the percentage of sales that is available with the company to cover its fixed expenses and profit refers to contribution margin ratio. The ratio is used to determine the profits from various levels of sales.
Requirement 4:
To 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.
Answer to Problem 4PSA
Sales level required in dollars to earn $200, 000 of target pretax income would be $1, 083, 333.
Sales level required in units to earn $200, 000 of target pretax income would be 21, 667 units.
Explanation of Solution
Required sales in dollars:
Required sales in dollars is computed by using the formula,
Required sales in dollars = [Fixed costs + Target pretax income]/Contribution Margin Ratio
Required sales in dollars = [$450, 000+$200, 000]/60%
Required sales in dollars = $650, 000/60%
Required sales in dollars = $1, 083, 333
Note: Contribution Margin Ratio is 60% as computed in Requirement 2.
Required sales in units:
Required sales in units is computed by using the formula,
Required sales in units = [Fixed costs + Target pretax income]/Contribution Margin per unit
Required sales in units = [$450, 000+$200, 000]/$30
Required sales in units = 21, 666.66 units i.e. 21, 667 units (Rounded up to whole units)
Note 1: Fixed costs of $250, 000 and increase in annual fixed costs of $200, 000 is added.
Note 2: Contribution Margin per unit is $30 computed in Requirement 2.
Concept introduction:
Break-Even Point: The level of sales at which profits are zero refers to break-even point. In other words, it is the point where total revenue equals total cost and total contribution margin equals total fixed cost.
Contribution Margin Ratio: The ratio that indicates the percentage of sales that is available with the company to cover its fixed expenses and profit refers to contribution margin ratio. The ratio is used to determine the profits from various levels of sales.
Requirement 5:
To prepare:
The forecasted contribution margin income statement that shows the results at the dollar sales level of $1, 083, 333 and unit sales level of 21, 666 assuming no income taxes due.
Answer to Problem 4PSA
| Astro Co. Forecasted Contribution Margin Income Statement For Year Ended December 2016 | ||
| $ per unit | $ | |
| Sales | 50 | 1, 083, 333 |
| Less: Variable costs | 20 | 433, 333 |
| Contribution Margin | 30 | 650, 000 |
| Less: Fixed Costs | 450, 000 | |
| Income before taxes | 200, 000 | |
Explanation of Solution
Computation of sales:
Sales unit [As computed in Requirement 4]: 21, 666 units
Selling price per unit: $50
Sales = 21, 666*$50
Sales = $1, 083, 333
Computation of variable costs:
Sales unit [As computed in Requirement 4]: 21, 666 units
Variable costs per unit: $20
Variable costs = 21, 666*$20
Variable costs = $433, 333
Want to see more full solutions like this?
Chapter 5 Solutions
Connect 1 Semester Access Card For Managerial Accounting
- Bethany Company has just completed the first month of producing a new product but has not yet shipped any of this product. The product incurred variable manufacturing costs of 5,000,000, fixed manufacturing costs of 2,000,000, variable marketing costs of 1,000,000, and fixed marketing costs of 3,000,000. Under the variable costing concept, the inventory value of the new product would be: a. 5,000,000. b. 6,000,000. c. 8,000,000. d. 11,000,000.arrow_forwardGelbart Company manufactures gas grills. Fixed costs amount to 16,335,000 per year. Variable costs per gas grill are 225, and the average price per gas grill is 600. Required: 1. How many gas grills must Gelbart Company sell to break even? 2. If Gelbart Company sells 46,775 gas grills in a year, what is the operating income? 3. If Gelbart Companys variable costs increase to 240 per grill while the price and fixed costs remain unchanged, what is the new break-even point?arrow_forwardDeuce Sporting Goods manufactures a high-end model tennis racket. The company’s forecasted income statement for the year, before any special orders, is as follows: Fixed costs included in the forecasted income statement are $400,000 in manufacturing cost of goods sold and $200,000 in selling expenses. A new client placed a special order with Deuce, offering to buy 1,000 tennis rackets for $100.00 each. The company will incur no additional selling expenses if it accepts the special order. Assuming that Deuce has sufficient capacity to manufacture 1,000 more tennis rackets, by what amount would differential income increase (decrease) as a result of accepting the special order? (Hint: First compute the variable cost per unit relevant to this decision.)arrow_forward
- NoFat manufactures one product, olestra, and sells it to large potato chip manufacturers as the key ingredient in nonfat snack foods, including Ruffles, Lays, Doritos, and Tostitos brand products. For each of the past 3 years, sales of olestra have been far less than the expected annual volume of 125,000 pounds. Therefore, the company has ended each year with significant unused capacity. Due to a short shelf life, NoFat must sell every pound of olestra that it produces each year. As a result, NoFats controller, Allyson Ashley, has decided to seek out potential special sales offers from other companies. One company, Patterson Union (PU)a toxic waste cleanup companyoffered to buy 10,000 pounds of olestra from NoFat during December for a price of 2.20 per pound. PU discovered through its research that olestra has proven to be very effective in cleaning up toxic waste locations designated as Superfund Sites by the U.S. Environmental Protection Agency. Allyson was excited, noting that This is another way to use our expensive olestra plant! The annual costs incurred by NoFat to produce and sell 100,000 pounds of olestra are as follows: In addition, Allyson met with several of NoFats key production managers and discovered the following information: The special order could be produced without incurring any additional marketing or customer service costs. NoFat owns the aging plant facility that it uses to manufacture olestra. NoFat incurs costs to set up and clean its machines for each production run, or batch, of olestra that it produces. The total setup costs shown in the previous table represent the production of 20 batches during the year. NoFat leases its plant machinery. The lease agreement is negotiated and signed on the first day of each year. NoFat currently leases enough machinery to produce 125,000 pounds of olestra. PU requires that an independent quality team inspects any facility from which it makes purchases. The terms of the special sales offer would require NoFat to bear the 1,000 cost of the inspection team. Based solely on financial factors, explain why NoFat should accept or reject PUs special sales offer.arrow_forwardNoFat manufactures one product, olestra, and sells it to large potato chip manufacturers as the key ingredient in nonfat snack foods, including Ruffles, Lays, Doritos, and Tostitos brand products. For each of the past 3 years, sales of olestra have been far less than the expected annual volume of 125,000 pounds. Therefore, the company has ended each year with significant unused capacity. Due to a short shelf life, NoFat must sell every pound of olestra that it produces each year. As a result, NoFats controller, Allyson Ashley, has decided to seek out potential special sales offers from other companies. One company, Patterson Union (PU)a toxic waste cleanup companyoffered to buy 10,000 pounds of olestra from NoFat during December for a price of 2.20 per pound. PU discovered through its research that olestra has proven to be very effective in cleaning up toxic waste locations designated as Superfund Sites by the U.S. Environmental Protection Agency. Allyson was excited, noting that This is another way to use our expensive olestra plant! The annual costs incurred by NoFat to produce and sell 100,000 pounds of olestra are as follows: In addition, Allyson met with several of NoFats key production managers and discovered the following information: The special order could be produced without incurring any additional marketing or customer service costs. NoFat owns the aging plant facility that it uses to manufacture olestra. NoFat incurs costs to set up and clean its machines for each production run, or batch, of olestra that it produces. The total setup costs shown in the previous table represent the production of 20 batches during the year. NoFat leases its plant machinery. The lease agreement is negotiated and signed on the first day of each year. NoFat currently leases enough machinery to produce 125,000 pounds of olestra. PU requires that an independent quality team inspects any facility from which it makes purchases. The terms of the special sales offer would require NoFat to bear the 1,000 cost of the inspection team. Assume for this question that NoFat rejected PUs special sales offer because the 2.20 price suggested by PU was too low. In response to the rejection, PU asked NoFat to determine the price at which it would be willing to accept the special sales offer. For its regular sales, NoFat sets prices by marking up variable costs by 10%. If Allyson decides to use NoFats 10% markup pricing method to set the price for PUs special sales offer, a. Calculate the price that NoFat would charge PU for each pound of olestra. b. Calculate the relevant profit that NoFat would earn if it set the special sales price by using its markup pricing method. (Hint: Use the estimate of relevant costs that you calculated in response to Requirement 1b.) c. Explain why NoFat should accept or reject the special sales offer if it uses its markup pricing method to set the special sales price.arrow_forwardNoFat manufactures one product, olestra, and sells it to large potato chip manufacturers as the key ingredient in nonfat snack foods, including Ruffles, Lays, Doritos, and Tostitos brand products. For each of the past 3 years, sales of olestra have been far less than the expected annual volume of 125,000 pounds. Therefore, the company has ended each year with significant unused capacity. Due to a short shelf life, NoFat must sell every pound of olestra that it produces each year. As a result, NoFats controller, Allyson Ashley, has decided to seek out potential special sales offers from other companies. One company, Patterson Union (PU)a toxic waste cleanup companyoffered to buy 10,000 pounds of olestra from NoFat during December for a price of 2.20 per pound. PU discovered through its research that olestra has proven to be very effective in cleaning up toxic waste locations designated as Superfund Sites by the U.S. Environmental Protection Agency. Allyson was excited, noting that This is another way to use our expensive olestra plant! The annual costs incurred by NoFat to produce and sell 100,000 pounds of olestra are as follows: In addition, Allyson met with several of NoFats key production managers and discovered the following information: The special order could be produced without incurring any additional marketing or customer service costs. NoFat owns the aging plant facility that it uses to manufacture olestra. NoFat incurs costs to set up and clean its machines for each production run, or batch, of olestra that it produces. The total setup costs shown in the previous table represent the production of 20 batches during the year. NoFat leases its plant machinery. The lease agreement is negotiated and signed on the first day of each year. NoFat currently leases enough machinery to produce 125,000 pounds of olestra. PU requires that an independent quality team inspects any facility from which it makes purchases. The terms of the special sales offer would require NoFat to bear the 1,000 cost of the inspection team. Assume for this question that Allysons relevant analysis reveals that NoFat would earn a positive relevant profit of 10,000 from the special sale (i.e., the special sales alternative). However, after conducting this traditional, short-term relevant analysis, Allyson wonders whether it might be more profitable over the long term to downsize the company by reducing its manufacturing capacity (i.e., its plant machinery and plant facility). She is aware that downsizing requires a multiyear time horizon because companies usually cannot increase or decrease fixed plant assets every year. Therefore, Allyson has decided to use a 5-year time horizon in her long-term decision analysis. She has identified the following information regarding capacity downsizing (i.e., the downsizing alternative): The plant facility consists of several buildings. If it chooses to downsize its capacity, NoFat can immediately sell one of the buildings to an adjacent business for 30,000. If it chooses to downsize its capacity, NoFats annual lease cost for plant machinery will decrease to 9,000. Therefore, Allyson must choose between these two alternatives: Accept the special sales offer each year and earn a 10,000 relevant profit for each of the next 5 years or reject the special sales offer and downsize as described above. Assume that NoFat pays for all costs with cash. Also, assume a 10% discount rate, a 5-year time horizon, and all cash flows occur at the end of the year. Using an NPV approach to discount future cash flows to present value, a. Calculate the NPV of accepting the special sale with the assumed positive relevant profit of 10,000 per year (i.e., the special sales alternative). b. Calculate the NPV of downsizing capacity as previously described (i.e., the downsizing alternative). c. Based on the NPV of Requirements 5a and 5b, identify and explain which of these two alternatives is best for NoFat to pursue in the long term.arrow_forward
- Bienestar, Inc., has two plants that manufacture a line of wheelchairs. One is located in Kansas City, and the other in Tulsa. Each plant is set up as a profit center. During the past year, both plants sold their tilt wheelchair model for 1,620. Sales volume averages 20,000 units per year in each plant. Recently, the Kansas City plant reduced the price of the tilt model to 1,440. Discussion with the Kansas City manager revealed that the price reduction was possible because the plant had reduced its manufacturing and selling costs by reducing what was called non-value-added costs. The Kansas City manufacturing and selling costs for the tilt model were 1,260 per unit. The Kansas City manager offered to loan the Tulsa plant his cost accounting manager to help it achieve similar results. The Tulsa plant manager readily agreed, knowing that his plant must keep pacenot only with the Kansas City plant but also with competitors. A local competitor had also reduced its price on a similar model, and Tulsas marketing manager had indicated that the price must be matched or sales would drop dramatically. In fact, the marketing manager suggested that if the price were dropped to 1,404 by the end of the year, the plant could expand its share of the market by 20 percent. The plant manager agreed but insisted that the current profit per unit must be maintained. He also wants to know if the plant can at least match the 1,260 per-unit cost of the Kansas City plant and if the plant can achieve the cost reduction using the approach of the Kansas City plant. The plant controller and the Kansas City cost accounting manager have assembled the following data for the most recent year. The actual cost of inputs, their value-added (ideal) quantity levels, and the actual quantity levels are provided (for production of 20,000 units). Assume there is no difference between actual prices of activity units and standard prices. Required: 1. Calculate the target cost for expanding the Tulsa plants market share by 20 percent, assuming that the per-unit profitability is maintained as requested by the plant manager. 2. Calculate the non-value-added cost per unit. Assuming that non-value-added costs can be reduced to zero, can the Tulsa plant match the Kansas City per-unit cost? Can the target cost for expanding market share be achieved? What actions would you take if you were the plant manager? 3. Describe the role that benchmarking played in the effort of the Tulsa plant to protect and improve its competitive position.arrow_forwardWellington, Inc., reports the following contribution margin income statement for the month of May. The company has the opportunity to purchase new machinery that will reduce its variable cost per unit by $10 but will increase fixed costs by 20%. Prepare a projected contribution margin income statement for Wellington, Inc., assuming it purchases the new equipment. Assume sales level remains unchanged.arrow_forwardMarkson and Sons leases a copy machine with terms that include a fixed fee each month plus acharge for each copy made. Markson made 9,000 copies and paid a total of $480 in January. In April, they paid $320 for 5,000 copies. What is the variable cost per copy if Markson uses the high-low method to analyze costs?arrow_forward
- Dimitri Designs has capacity to produce 30,000 desk chairs per year and is currently selling all 30,000 for $240 each. Country Enterprises has approached Dimitri to buy 800 chairs for $210 each. Dimitris normal variable cost is $165 per chair, including $50 per unit in direct labor per chair. Dimitri can produce the special order on an overtime shift, which means that direct labor would be paid overtime at 150% of the normal pay rate. The annual fixed costs will be unaffected by the special order and the contract will not disrupt any of Dimitris other operations. What will be the impact on profits of accepting the order?arrow_forwardAstro Co. sold 19,800 units of its only product and incurred a $48,292 loss (ignoring taxes) for the current year, as shown here. During a planning session for year 2020’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 $148,000. The maximum output capacity of the company is 40,000 units per year. ASTRO COMPANYContribution Margin Income StatementFor Year Ended December 31, 2019 Sales $ 738,540 Variable costs 590,832 Contribution margin 147,708 Fixed costs 196,000 Net loss $ (48,292 ) Contribution Margin Per Unit Current Year Contribution Margin Ratio Choose Numerator: / Choose Denominator: = Contribution Margin Ratio / = Contribution margin ratio Break-Even Point in Dollar Sales:…arrow_forwardAstro Co. sold 19,800 units of its only product and incurred a $48,292 loss (ignoring taxes) for the current year, as shown here. During a planning session for year 2020’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 $148,000. The maximum output capacity of the company is 40,000 units per year. ASTRO COMPANYContribution Margin Income StatementFor Year Ended December 31, 2019 Sales $ 738,540 Variable costs 590,832 Contribution margin 147,708 Fixed costs 196,000 Net loss $ (48,292 ) Prepare a forecasted contribution margin income statement for 2020 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…arrow_forward
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Principles of Cost AccountingAccountingISBN:9781305087408Author:Edward J. Vanderbeck, Maria R. MitchellPublisher:Cengage Learning
Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning