Question

Using the cost equation, you developed in Question 2.b. answer the following: y=60x + 40000

a. Assume the company expects to produce and sell 1,500 units during the following month at a price of $100 per unit:

i. Prepare an income statement based on financial reporting (absorption method)

ii. Prepare an income statement based on the contribution margin approach (variable method)

iii. Calculate the contribution margin per unit iv. Calculate the break-even point in units per month

Answer 1

1.

Income statement

sales (1,500 x 100)	150,000
variable cost (1,500 x 60)	-90,000
Fixed cost	-40,000
Net income	$20,000

2.

Income statement

sales	150,000
variable cost	-90,000
Contribution margin	60,000
Fixed cost	-40,000
Net income	$20,000

3.

Selling price per unit = $100

Variable cost per unit = $60

Fixed cost = $40,000

Contribution margin per unit = Selling price per unit - Variable cost per unit

= 100 - 60

= $40

4.

Break even point (in units) = Fixed cost/Contribution margin per unit

= 40,000/40

= 1,000 units

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