Question

Break-Even in Units and Sales Dollars, Margin of Safety

Aubrey Company produces a single product. Last year's income statement is as follows:

Sales (12,000 units) $1,218,000
Less: Variable costs 365,400
Contribution margin $852,600
Less: Fixed costs 300,000
Operating income $552,600

suppose that aubrey company is considering an investment in new technology that will increase fixed costs by $231,200 per year, but will lower variable costs to 42 percent of sales. units sold will remain unchanged. prepare a budgeted income statement assuming the company makes this investment.

Answer 1

The new budgeted income statement for Aubrey Company, after the investment that increases fixed costs but lowers variable costs to 42 percent of sales, results in operating income of $175,240. This represents a decrease from the previous operating income due to the higher increase in fixed costs compared to the savings on variable costs.

Step-by-step explanation:

When considering the new investment for Aubrey Company that increases fixed costs but lowers variable costs to 42 percent of sales, we must first calculate the new variable costs and fixed costs.

Given the unchanged sale price and quantity, sales remain at $1,218,000, and variable costs are now 42% of that, which equals $511,560.

The new fixed costs are the original amount plus the increase, which is $300,000 + $231,200 = $531,200.

Now, we can prepare the new budgeted income statement:

• Sales (12,000 units): $1,218,000
• Less: Variable Costs: $511,560
• Contribution Margin: $706,440
• Less: Fixed Costs: $531,200
• Operating Income: $175,240

The operating income has decreased due to the substantial increase in fixed costs beyond the savings achieved on variable costs.