Exercise-3 (Unit product cost under variable costing, break-even point)

Beta company manufactures and sells large size tables to be used in the offices of the executives. One table is sold for $400. The selected data for year 2016 is given below:

Manufacturing expenses:

• Direct materials per unit: $120
• Direct labor per unit: $60
• Variable manufacturing overhead per unit: $20
• Fixed manufacturing overhead per year: $600,000

Non-manufacturing expenses:

• Variable selling and administrative expense per unit: $40
• Fixed selling and administrative expense per year: $900,000

Inventory information:

• Units in opening inventory: 0 units
• Units produced during 2016: 10,000 units
• Units sold during 2016: 9,000 units
• Units in closing inventory: 1,000 units

 Required:

1. Compute cost of one table under variable costing.
2. Prepare income statement if variable costing is used.
3. Compute break even point both in units and in dollars.
4. Calculate net operating income of the company under absorption costing by preparing a reconciliation schedule. (Do not prepare absorption costing income statement).

Solution

(1) Computation of the cost of one office table:

(2) Income statement under variable costing system:

(3). Break-even point:

We can easily calculate break-even point using contribution margin method:

(a). Break even point in units = Total fixed expenses/Contribution margin per unit
= $1,500,000/$160*
= 9,375 Units

*$1,440,000/9,000 Units

(b). Break even point in dollars = Break even point in units × Sale price per unit
= 9,375 Units × $400
= $3,750,000

(4) Net operating income under absorption costing:

The inventory has increased during the period by 1,000 units. The fixed manufacturing overhead cost included in 1,000 units would be added to the variable costing net operating income to obtain absorption costing net operating income figure.