Question

Astro Co. sold 20,500 units of its only product and incurred a $67,750 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 40% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $155,000. 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 $ 779,000 Variable costs 584,250 Contribution margin 194,750 Fixed costs 262,500 Net loss $ (67,750 ) Required: 1. Compute the break-even point in dollar sales for year 2017. (Round your answers to 2 decimal places.)

Answer 1

To calculate the break-even point in dollar sales for Astro Co. for 2017, the fixed costs are divided by the contribution margin ratio, which gives us a break-even point of $1,050,000.

Step-by-step explanation:

To find the break-even point in dollar sales for Astro Co. for the year 2017, we need to employ the contribution margin approach. The formula to compute the break-even point in dollars is:

Break-even point (in dollars) = Fixed Costs ÷ Contribution Margin Ratio

The Contribution Margin Ratio is calculated as follows:

Contribution Margin Ratio = Contribution Margin ÷ Sales

From the data provided:

• Fixed Costs = $262,500
• Contribution Margin = $194,750
• Sales = $779,000

Hence, the Contribution Margin Ratio is:

Contribution Margin Ratio = $194,750 ÷ $779,000

Contribution Margin Ratio = 0.25 (rounded to two decimal places)

Now, we calculate the Break-even point:

Break-even point (in dollars) = $262,500 ÷ 0.25

Break-even point (in dollars) = $1,050,000

This means that Astro Co. must generate sales of $1,050,000 to break even in 2017.

Answer 2

Break even point in dollar sales = $1,050,000

Step-by-step explanation:

Break Even Point in dollar sales = Fixed Cost/ Contribution margin percentage

Contribution margin percentage = (Contribution margin/ Sales) X 100

Here we have for the year 2017

Contribution margin = $194,750

Sales = $779,000

Contribution margin percentage = ($194,750/$779,000) X 100 = 25%

Break even point in dollar sales = Fixed Cost $262,500/25%

= $1,050,000