Concept explainers
Rivera Co. sold 20,000units 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 a machine that automates several operations. To obtain these saving, the company must increase its annual fixed costs by $150,000. The maximum output capacity of the company is 40,000 units per year.
RIVERA COMPANY |
Contribution Margin Income Statement
For Year Ended December 31.2015
Required
- Compute the break-even points in dollar sales for year 2015.
- Compute the predicted break-even point in dollar sales for year 2016 assuming the machine is installed and no change occurs in the unit selling price. (Round the change in variable costs to a whole number.)
- Prepare a
forecasted contribution margin income statement for 2016 that show 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 answer to whole dollars and whole units.)
- Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume no income taxex 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 Rivera Co. for the year 2016.
Answer to Problem 4PSB
Break-even point in dollar sales of Rivera Co. is $1, 000, 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: $750, 000
Sales unit: 20, 000
Selling price per unit = $750, 000/20, 000 units
Selling price per unit = $37.50
Variable costs: $600, 000
Sales unit: 20, 000
Variable cost per unit = $600, 000/20, 000
Variable cost per unit = $30.00
Contribution Margin per unit is computed as in the below table:
Contribution Margin per unit | ($) per unit. |
Selling Price per unit | 37.50 |
Less: Variable Cost per unit | (30.00) |
Contribution Margin per unit | 7.50 |
Therefore Contribution Margin Ratio = $7.50/$37.50
Contribution Margin Ratio = 20%
Break-even point in dollars is computed by using the formula as below:
Break-even point (in dollars) = $200, 000/20%
Break-even point (in dollars) = $1, 000, 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 4PSB
The break-even point in dollar sales of Rivera Co. after installation of machine with no change in selling price per unit would be $583, 333.
Explanation of Solution
Break-even point in sales dollars is computed by using the formula,
Break-even point (in dollars) = Fixed Costs/Contribution Margin Ratio:
Where Contribution Margin Ratio = Contribution Margin per unit/ Sales per unit
Contribution Margin per unit = Selling price per unit-Variable cost per unit
Contribution Margin per unit is computed as in the below table:
Contribution Margin | ($) Per Unit |
Sales | 37.50 |
Less: Variable Cost | (15) |
Contribution Margin | 22.50 |
Therefore Contribution Margin Ratio = $22.50/$37.50
Contribution Margin Ratio = 60%
Break-even point in dollars is computed by using the formula as below:
Break-even point (in dollars) = $350, 000/60%
Break-even point (in dollars) = $583, 333
Note 1: Annual fixed costs is increased by $200, 000 as given in the problem. So now the fixed costs would be $200, 000+$150, 000=$350, 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 Rivera Co. for the year 2016 showing the expected results with the machine installed.
Answer to Problem 4PSB
Rivera Co. Forecasted Contribution Margin Income Statement for the year 2016 | |
Amount in $ | |
Sales | 750, 000 |
Less: Variable costs | (300, 000) |
Contribution Margin | 450, 000 |
Less: Fixed costs | (350, 000) |
Net income | 100, 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: $15
Variable costs = 20, 000*$15
Variable costs = $300, 000
Note: Variable costs is reduced by 50% by installing a machine.
Computation of total fixed costs:
Fixed Costs in 2015: $200, 000
Increase in annual costs of 2016: $150, 000
Total fixed costs = $200, 000 + $150, 000
Total fixed Costs = $350, 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 4PSB
Sales level required in dollars to earn $200, 000 of target pretax income would be $916, 667.
Sales level required in units to earn $200, 000 of target pretax income would be 24, 445 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 = [$350, 000+$200, 000]/70%
Required sales in dollars = $550, 000/60%
Required sales in dollars = $916, 667
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 = [$350, 000+$200, 000]/$22.50
Required sales in units = 24, 444.44 units i.e. 24, 445 units (Rounded up to whole units)
Note 1: Fixed costs of $200, 000 and increase in annual fixed costs of $150, 000 is added.
Note 2: Contribution Margin per unit is $22.50 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 $916, 667and unit sales level of 24, 445 assuming no income taxes due.
Answer to Problem 4PSB
Rivera Co. Forecasted Contribution Margin Income Statement For Year Ended December 2016 | ||
$ per unit | $ | |
Sales | 37.50 | 916, 688 |
Less: Variable costs | 15 | 366, 675 |
Contribution Margin | 22.50 | 550, 013 |
Less: Fixed Costs | 350, 000 | |
Income before taxes | 200, 013 |
Explanation of Solution
Computation of sales:
Sales unit [As computed in Requirement 4]: 24, 445 units
Selling price per unit: $37.50
Sales = 24, 445*$37.50
Sales = $916, 687.5.5 i.e. 916, 688 (Rounded up to whole number)
Computation of variable costs:
Sales unit [As computed in Requirement 4]: 24, 445 units
Variable costs per unit: $15
Variable costs = 24, 445*$15
Variable costs = $366, 675
Want to see more full solutions like this?
Chapter 5 Solutions
MANAGERIAL ACCOUNTING FUND. W/CONNECT
- Artisan Metalworks has a bottleneck in their production that occurs within the engraving department. Jamal Moore, the COO, is considering hiring an extra worker, whose salary will be $55,000 per year, to solve the problem. With this extra worker, the company could produce and sell 3,000 more units per year. Currently, the selling price per unit is $25 and the cost per unit is $7.85. Using the information provided, calculate the annual financial impact of hiring the extra worker.arrow_forwardVariety Artisans has a bottleneck in their production that occurs within the engraving department. Arjun Naipul, the COO, is considering hiring an extra worker, whose salary will be $45,000 per year, to solve the problem. With this extra worker, the company could produce and sell 3,500 more units per year. Currently, the selling price per unit is $18 and the cost per unit is $5.85. Using the information provided, calculate the annual financial impact of hiring the extra worker.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 ) Compute the sales level required in both dollars and units to earn $180,000 of target pretax income in 2020 with the machine installed and no change in unit sales price Sales level required in dollars Choose Numerator: / Choose Denominator: = Sales Dollars…arrow_forward
- Astro 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 ) Compute the predicted break-even point in dollar sales for 2020 assuming the machine is installed and there is no change in the unit selling price. (Round to 2 decimal places.) Contribution Margin per unit Proposed $0.00…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 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 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 $200,000. The maximum output capacity of the company is 40,000 units per year. Contribution Margin Income Statement For Year Ended December 31, 2019 Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000,000 Variable costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000 Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000 Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .…arrow_forward
- Astro Co. sold 19,200 units of its only product and incurred a $43,072 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 $142,000. The maximum output capacity of the company is 40,000 units per year. ASTRO COMPANY Contribution Margin Income statement For Year Ended December 31, 2019 $704,640 Sales Variable costs Contribution margin Fixed costs 563,712 140,928 184,000 Net loss $ (43,072) repare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume no me taxes will be due. (Do not round intermediate calculations. Round "per unit answers" to 2 decimal places.) ASTRO COMPANY Forecasted Contribution Margin Income Statement For Year Ended December 31, 2020 $ Per…arrow_forwardAstro 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 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 $200,000. The maximum output capacity of the company is 40,000 units per year. ASTRO COMPANYContribution Margin Income StatementFor Year Ended December 31, 2019 Sales $ 1,000,000 Variable costs 800,000 Contribution margin 200,000 Fixed costs 250,000 Net loss $ (50,000 ) 4. Compute the sales level required in both dollars and units to earn $200,000 of target pretax income in 2020 with the machine installed and no change in unit sales price.arrow_forwardAstro Co. sold 19,200 units of its only product and incurred a $43,072 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 $142,000. The maximum output capacity of the company is 40,000 units per year. ASTRO COMPANY Contribution Margin Income Statement For Year Ended December 31, 2019 $704,640 Sales Variable costs 563,712 Contribution margin 140,928 Fixed costs 184,000 Net loss $ (43,072) ompute the predicted break-even point in dollar sales for 2020 assuming the machine is installed and there is no change in the selling price. (Round your answers to 2 decimal places.) Contribution Margin per unit Proposed $ 0.00 Contribution Margin Ratio Choose Numerator: Choose Denominator: Contribution Margin Ratio Contribution margin…arrow_forward
- [The following information applies to the questions displayed below.] Astro Co. sold 19,200 units of its only product and incurred a $43,072 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 $142,000. The maximum output capacity of the company is 40,000 units per year. ASTRO COMPANY Contribution Margin Income Statement For Year Ended December 31, 2019 $704,640 563,712 Sales Variable costs Contribution margin Fixed costs 140,928 184,000 Net loss $ (43,072) Required: . Compute the break-even point in dollar sales for 2019. (Round your answers to 2 decimal places.) Contribution Margin Per Unit Current Year $ 0.00 Contribution Margin Ratio Choose Numerator: Choose Denominator: Contribution Margin Ratio Contribution margin ratio…arrow_forward[The following information applies to the questions displayed below.] Astro Company sold 22,500 units of its only product and reported income of $60,000 for the current year. During a planning session for next year's activities, the production manager notes that variable costs can be reduced 45% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $155,000. Total units sold and the selling price per unit will not change. ASTRO COMPANY Contribution Margin Income Statement For Year Ended December 31 Sales ($55 per unit) Variable costs ($50 per unit) Contribution margin Fixed costs Income 1. Compute the break-even point in dollar sales for next year assuming the machine is installed. (Round your answers to 2 decimal places.) Contribution margin Contribution Margin Ratio Numerator: Contribution margin per unit $ 1 Fixed costs per unit $ 1,237,500 1,125,000 112,500 52,500 $ 60,000 $ Denominator: Selling price…arrow_forward[The following information applies to the questions displayed below.] Astro Co. sold 19,200 units of its only product and incurred a $43,072 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 $142,000. The maximum output capacity of the company is 40,000 units per year. ASTRO COMPANY Contribution Margin Income Statement For Year Ended December 31, 2019 $704,640 563,712 Sales Variable costs Contribution margin Fixed costs 140,928 184,000 Net loss $(43,072) Compute the sales level required in both dollars and units to earn $120,000 of target pretax income in 2020 with the machine stalled and no change in unit sales price. (Do not round intermediate calculations. Round your answers to 2 decimal places. pund "Contribution margin…arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax CollegeManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning