Question

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 93,000 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 9,300 units, and operating income for the year was $334,800.

Required:
1. If Yellowstone Company had used variable costing, its operating income would have been $297,600. Compute the break-even point in units under variable costing.

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Answer #1

first we shall know the amount of fixed cost per unit from the given information:

difference in operating incomes / ending inventory

=> (334,800-297,600) / 9,300 units

=>$4 per unit.

total fixed costs =$4*93,000 units

=>$372,000.

total contribution = total fixed costs + profit under variable costing

=>372,000 +297,600

=>$669,600.

units sold =93,000 sold - 9,300 closing stock.

contribution per unit = $669,600 / 83,700 units sold

=>$8 per unit.

break even units = fixed costs / contribution per unit

=>$372,000 / 8

=>46,500 units.

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