Answer 1:
Breakeven point is that level of sales at which the Company is at a No profit no loss situation. This means that the company is able to fully recover its variable cost and fixed cost but nothing above that.
Breakeven point in Unit Sales
Answer to Problem 18P
Solution:
Break-even Point (Unit Sales) = 60,000 units
Explanation of Solution
- Break-even point is computed to calculate the minimum sales that must be achieved to arrive at a no profit no loss situation;
- Break-even point in unit salesis calculated by dividing the Fixed cost with contribution per unit Break-even point in dollar salesis calculated by dividing the Fixed cost with contribution Margin %
- Contribution per unit is Selling price per unit less variable cost per unit.
- Given: Selling Price and Variable cost per unit is readily given
- Formula used:
- Calculation:
Selling Price per unit = $ 58 per unit
Haas Company will have to sell atleast 60,000 units to be able to fully recover its variable as well as fixed cost.
Answer 2
Variable Costing: is also known as Direct costing method. In this method, those costs which vary directly with production are considered in product cost. Fixed Manufacturing Expenses are treated as period cost and not product cost. Selling Expenses (since they do not vary with production), both variable and fixed, are charged off completely in the period in which the expenses get incurred.
Unit product Cost and Income statement for 3 years under variable costing
Answer to Problem 18P
Solution:
Explanation of Solution
- In variable costing, direct material, direct labour and variable manufacturing expenses are considered for unit product cost;
- The income statement under this method requires following computations:
Variable cost comprises of variable cost of goods sold and variable selling expenses
Fixed cost comprises of fixed
- Formulas:
Variable Cost of Goods Sold:
Note: Unit product cost here is unit cost computed as per variable costing.
Answer 3
Absorption Costing: is also known as Full costing method. In this method, those costs which vary directly with production are considered in product cost. Also, fixed Manufacturing Expenses are treated as product cost only. Selling Expenses (since they do not vary with production), both variable and fixed, are charged off completely in the period in which the expenses get incurred.
Unit product Cost and Income statement for 3 years under absorption costing.
Answer to Problem 18P
Solution:
Computation of Unit Product Cost under Absorption Costing | |||
Year 1 | Year 2 | Year 3 | |
Direct Material | $ 20 | $ 20 | $ 20 |
Direct Labour | $ 12 | $ 12 | $ 12 |
Variable Manufacturing | $ 4 | $ 4 | $ 4 |
Fixed Manufacturing Overhead | $ 16 | $ 13 | $ 24 |
Total Product Cost | $ 52 | $ 49 | $ 60 |
Income Statement under Absorption Costing | ||||
Year 1 | Year 2 | Year 3 | ||
A | Sales(Sales Volume X Sales Price) | $3,480,000 | $2,900,000 | $3,770,000 |
B | Less: Cost of Goods Sold | |||
C | Beginning Inventory
(Opening Inventory Quantity X Unit Product Cost of previous year) | $1,220,000 | ||
D | Add: Cost of Goods Manufactured
(Production Quantity X Unit Product Cost) | $3,120,000 | $3,660,000 | $2,400,000 |
E | Less: Closing Inventory
(Closing Inventory Quantity X Unit Product Cost of current year) | $ - | $1,220,000 | $ - |
B | Cost of Goods Sold (C+D-E) | $3,120,000 | $2,440,000 | $3,620,000 |
F | Gross Margin (A - B) | $ 360,000 | $ 460,000 | $ 150,000 |
G | Variable Selling & Admin Expenses
(Sales quantity X Variable selling cost per unit) | $ 120,000 | $ 100,000 | $ 130,000 |
H | Fixed Selling Overhead | $ 240,000 | $ 240,000 | $ 240,000 |
I | Net Operating Income (F - G - H) | $ - | $ 120,000 | $ (220,000) |
Working Note:
Year 1 | Year 2 | Year 3 | Remarks | |
Sales Volume | 60,000 | 50,000 | 65,000 | (as given in question) |
Production Volume | 60,000 | 75,000 | 40,000 | (as given in question) |
Opening Stock | - | - | 25,000 | (Closing Stock of previous year) |
Closing Stock | - | 25,000 | - | (Opening Stock + Production - Sales) |
Selling Price per unit | 58 | 58 | 58 | (as given in question) |
Variable Manufacturing Cost per unit | $52 | $49 | $60 | (Computed Unit Product Cost) |
Fixed Manufacturing Cost | $960,000 | $960,000 | $960,000 | |
Fixed Manufacturing Cost per unit | $16 | $13 | $24 | (Fixed manufacturing cost / Production Qty) |
Variable Selling Cost | $2 | $2 | $2 | (as given in question) |
Explanation of Solution
- In absorption costing, direct material, direct labour, variable manufacturing expenses and fixed manufacturing cost per unit are considered for unit product cost;
- The income statement under this method requires following computations:
Cost of Goods Sold comprises of variable as well as fixed manufacturing cost
Total selling expenses comprise of variable as well as fixed selling cost
- Formulas:
Cost of Goods Sold:
Note: Unit product cost here is unit cost computed as per absorption costing.
Answer 4
- Comparison of operating income under variable costing
Explanation of Solution
Year 1 | Year 2 | Year 3 | |
Break Even Unit in Sales | 60,000 | 60,000 | 60,000 |
Actual Sales Quantity | 60,000 | 50,000 | 65,000 |
Net Operating Income | $ - | $(200,000) | $ 100,000 |
Break-even point, actual sales quantity and net operating income have been taken from computations above.
Conclusion:
In Year 1, Actual sales are equal to Break-even which means No profit No Loss situation.
In Year 2, Actual sales are less than Break-even. As such, there is loss under this costing system
border-bottom: solid 1px black;>In Year 3, Actual sales are more than Break-even. As such, there is profit under this costing system
Explanation of Solution
Comparison under Absorption Costing | |||
Year 1 | Year 2 | Year 3 | |
Break Even Unit in Sales | 60,000 | 60,000 | 60,000 |
Actual Sales Quantity | 60,000 | 50,000 | 65,000 |
Net Operating Income | $ - | $ 120,000 | $(220,000) |
Break-even point, actual sales quantity and net operating income have been taken from computations above.
Conclusion:In Year 1, Actual sales are equal to Break-even which means No profit No Loss situation.In Year 2, Actual sales are less than Break-even. However, still there is profit under this costing systemIn Year 3, Actual sales are more than Break-even. However, still there is loss under this costing
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Chapter 7 Solutions
Introduction to Managerial Accounting - Connect Access
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