Question

Astro Co. sold 20,600 units of its only product and incurred a $55,028 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2018’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 $156,000. The maximum output capacity of the company is 40,000 units per year. ASTRO COMPANY Contribution Margin Income Statement For Year Ended December 31, 2017 Sales $ 784,860 Variable costs 627,888 Contribution margin 156,972 Fixed costs 212,000 Net loss $ (55,028 ) Prepare a forecasted contribution margin income statement for 2018 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.

Answer 1

Step-by-step explanation:

Contribution : Contribution tells the availability of funds. It is computed by taking a difference of sales and variable cost.

The equation to compute net income is shown below:

Sales - Variable cost = Contribution ;

Contribution - Fixed expense = Net income

For computing the foretasted contribution for 2018, the following information is need to be considered which is shown below.

1. As for variable cost, 50% should be recognized i.e 627,888 × 50% = $313,944

2. The fixed cost is increased by $156,000. So the revised fixed cost = 212,000 + $156,000 = $368,000

3. Other things remain same.

The calculation attachment is given below: