Problem - Teller Co. sold 20,500 units of its only product and incurred a $65,000 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2010'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 $210,000. The maximum output capacity of the company is 41,000 units per year.

TELLER COMPANY

Contribution Margin Income Statement

For Year Ended December 31, 2009

Sales $1,025,000

Variable costs 820,000

Contribution margin 205,000

Fixed costs 270,000

Net loss $(65,000)

1. Compute the break-even point in dollar sales for year 2009.

2. Compute the predicted break-even point in dollar sales for year 2010 assuming the machine is installed and there is no change in unit sales price.

3. Prepare a forecasted contribution margin income statement for 2010 that shows the expected results with the machine installed. Assume that the unit sales 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 $132,951 of after-tax income in 2010 with the machine installed and no change in unit sales price. Assume that the income tax rate is 30%.

5. Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in requirement 4. Assume an income tax rate of 30%.