Let’s say that a company produces a single product with a sale price of $25 per unit. The variable cost per unit is $15 and the company incurs fixed costs of $50,000 per month. What is the breakeven point for this company? How much would we expect in profit for every unit sold above breakeven? What if the company has its budget set at a $35,000 target profit? How many units must it sell?
Let’s work through an example so that we can all see how to apply these concepts! Using the data ONLY in Problem 7.12, pp. 301 and 302, let’s calculate/prepare:
1. The product unit cost using absorption;
2. Income statement for the month using absorption costing;
3. The product unit cost using contribution approach; and
4. Income statement for the month using variable costing.
Questions:
1. What would the value of ending inventory be, using absorption costing?
2. What would the value of ending inventory be, using the contribution margin approach?
3. Which method (absorption or contribution margin) provides us with the most accurate net income? Please explain.
4. How many units must be sold to reach a profit target of $50,000?