Question

Variable and absorption costing and breakeven points. Camino, a leading firm in the sports industry, produces basketballs for the consumer market. For the year ended December 31, 2017, Camino sold 400,000 basketballs at an average selling price of $12 per unit. The following information also relates to 2017 (assume constant unit costs and no variances of any kind):
Inventory, January 1, 2017: 0 basketballs
Inventory, December 31, 2017: 20,000 basketballs
Fixed manufacturing costs: $380,000
Fixed administrative costs: $660,000
Direct materials costs: $ 3 per basketball
Direct labor costs: $ 4 per basketball

1. Prepare income statements under (a) variable, (b) absorption, and (c) throughput costing for the year endedDecember 31,2017.
2. Calculate the breakeven point (in basketballs sold) in 2017 under:
a. Variable costing
b. Absorption costing
c. Throughput costing
3. Suppose direct materials costs were $4 per basketball instead. Assuming all other data are the same, calculate the minimum number of basketballs Camino must have sold in 2017 to attain a target operating income of $120,000 under:
a. Variable costing
b. Absorption costing
c. Throughput costing

Answer 1

Answer:

1       VARIABLE COSTING ABSORPTTION THROUGHPUT

sales    4800000                      4800000              4800000

opening stock 0                                      0                       0

produced    2940000                       3320000                1260000

closing     140000                      158095.24          60000

cost of sales     2800000                    3161904.762         1200000

contribution     2000000                    1638095.238        3600000

direct labour                                                           1680000

fixed cost    

admin        660000                         660000           660000

manufacturing      380000                                                  380000

net income  960000                   978095.2381          880000

2.            variable                        absorption       throughput

breakeven  $218,487                  $160,976       121353.5589

3. units to be sold 145000                        87640.44944            332000

Explanation:

UNIT COST  7                                     7.90                      3

material          3                                       3                         3

labor          4                                         4  

fixed cost                                        0.90  

   

   

produced units    

opening           0                                          0                          0

produced  420000                           420000             420000

closing          20000                            20000                      20000

sold                  400000                            400000              400000

breakeven = fixed cost / contribution per unit

3.  change in unit cost  

                   variable   absorption throughput

material            4                4              4

labour                 4                 4  

fixed cost                         0.9  

unit cost                8                8.9               4

sales    

opening stock    

produced    

closing    

cost of sales    

contribution  1160000    780000     1328000

direct labour                                 168000

fixed cost    

admin          660000         660000       660000

manufacturing                  380000  380000

net income  120000          120000         120000

to get the amounts for the closing stock, opening stock, produced and sold we multiply by unit cost

to get produced units we take sold stock plus closing stock less openning stock

to get the units that must be sold to make net income of 120 000

we do bottom up approach and can stop at contribution then divide it by contribution per unit.