Rivera Co. sold 20,000 units of its only product and incurred a \(50,000 loss (ignoring taxes) for the current year, as shown here. During a planning session for year 2018’s activities, the production manager notes that variable costs can be reduced 50% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by \)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, 2017 |
Sales | \(750,000 |
Variable costs | 600,000 |
Contribution margin | 150,000 |
Fixed cost | 200,000 |
Net loss | (\)50,000) |
Required
1. Compute the break-even point in dollar sales for year 2017.
2. Compute the predicted break-even point in dollar sales for year 2018 assuming the machine is installed and no change occurs in the unit selling price. (Round the change in variable costs to a whole number.)
3. 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.
4. Compute the sales level required in both dollars and units to earn $200,000 of target pretax income in 2018 with the machine installed and no change in unit sales price. (Round answers to whole dollars and whole units.)
5. Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume no income taxes will be due.
