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Yellowstone Company began operations on January 1 to produce a single product. It used an absorption...

Yellowstone Company began operations on January 1 to produce a single product. It used an absorption costing system with a planned production volume of 115,000 units. During its first year of operations, the planned production volume was achieved, and there were no fixed selling or administrative expenses. Inventory on December 31 was 11,500 units, and operating income for the year was $103,500.

Required: 1. If Yellowstone Company had used variable costing, its operating income would have been $57,500. Compute the break-even point in units under variable costing.

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Answer #1

Solution:

Fixed cost deferred in ending inventory = Absorption income - variable costing incoem = 103500-57500 = $46,000

Fixed cost per unit = $46000 / 11500 = $4

Total fixed costs = $4*115000 units = $460,000

Total contribution margin = variable costing income + Total fixed costs = $517,500

contribution margin per unit = $517500 / units sold = $517500 / (115000-11500) = $5

brak even point in units Total fixed costs / contribution margin per unit = $460000/ 5 = 92,000 units

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