Question

1:16 EMA Management Accounting Cha... 2) Haas Company manufactures and sells one product. The following information pertains to each of the company's first three years of operations: During its first year of operations, Haas produced 40,000 units and sold 40,000 units. During its second year of operations, it produced 55,000 units and sold 30,000 units. The selling price of the company's product is $66 per unit. Required: 1. Compute the company's break-even point in both units and $ sales. 2. Assume the company uses variable costing: Prepare an income statement for Year 1, Year 2,

Answer 1

Solution.

1. Computation of Breakeven Point in Units and Dollars.

Breakeven Points in Units = Total Fixed Cost $\div$ Contribution Margin per unit

= $640,000 $\div$ $16

= 40,000 Units

Breakeven Points in Dollar = Total Fixed Cost $\div$ Contribution Margin Ratio

Breakeven Points in Dollar = $640,000 $\div$ 0.242424 = $2,640,000

Notes:

Total Fixed Cost = Fixed manufacturing overhead + Fixed selling and Adm. Expense

   = 440,000 + 200,000 = $640,000

Contribution Margin per Unit = Selling Price per unit - Total Variable Cost per Unit

= $66 - $(24+20+5+1) = $66 - $50

= $16

Contribution Margin Ratio = Contribution margin per unit $\div$ Selling Price per unit
Contribution Margin Ratio = $16 $\div$ $66 = 0.242424 OR 24.2424%

2.Income Statement when Company uses Variable Costing System
Haas Company
Variable Costing Income Statement
	Year 1	Year 2
Sales @ $66 per unit	$   26,40,000	$ 19,80,000
Less: Variable Expense
Variable Cost of Goods Sold @ $ 49	$   19,60,000	$ 14,70,000
Variable Selling & Adm. Expense @ $1	$        40,000	$       30,000
Contribution Margin	$     6,40,000	$    5,80,000
Less: Fixed Cost:
Fixed manufacturing Expense	$     4,40,000	$    4,40,000
Fixed Selling & Adm. Expense	$     2,00,000	$    2,00,000
Net Operating Income/Loss	$    0	$      - 60,000

3.Income Statement when Company uses Absorption Costing System
Haas Company
Absorption Costing Income Statement
	Year 1	Year 2
Sales @ $66 per unit	$   26,40,000	$ 19,80,000
Less: Cost of Goods Sold @ $60 and $57	$   24,00,000	$ 17,10,000
Gross Margin (Contribution Margin)	$     2,40,000	$    2,70,000
Less: Selling and Adm. Expense
Variable @ $1 per unit	$        40,000	$       30,000
Fixed Cost:	$     2,00,000	$    2,00,000
Net Operating Income/Loss	$    0	$       40,000
Cost of Goods Sold per unit
Cost of Goods Produced per unit	Year 1	Year 2
Variable Manufacturing Cost per unit	$     49.00	$     49.00
Fixed Manufacturing cost per unit	$     11.00	$       8.00
Total Manufacturing Cost per	$     60.00	$     57.00
Variable Manufacturing Cost per unit = 25 +20 + 5 = $ 49
Total Fixed Manufacuring overhead	$440,000	$ 4,40,000
Total Units	40,000	55,000
Fixed Manufacturing cost per unit	$11	$           8