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 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 $150,000. The maximum output capacity of the company is 40,000 units per year. Contribution Margin Income Statement For Year Ended December 31, 2019 Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $750,000 Variable costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (50,000) Required 1. Compute the break-even point in dollar sales for 2019. 2. Compute the predicted break-even point in dollar sales for 2020 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 2020 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 2020 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.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
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 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 $150,000. The maximum output
capacity of the company is 40,000 units per year. Contribution Margin Income Statement
For Year Ended December 31, 2019
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $750,000
Variable costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (50,000) Required
1. Compute the break-even point in dollar sales for 2019.
2. Compute the predicted break-even point in dollar sales for 2020 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
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
2020 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.
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