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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 108,000 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 10,800 units, and operating income for the year was $291,600.

Required:
1. If Yellowstone Company had used variable costing, its operating income would have been $237,600. Compute the break-even point in units under variable costing.

Solutions

Expert Solution

Variable Costing operating income $237,600
Add: Fixed cost element in closing inventory $54,000 (291600-237600)
Absorption costing opearting income $291,600
Total Ending inventory units           10,800
Fixed cost per unit in ending inventory $5 (54000/10800)
Planned production 108000 units
Total fixed Cost = 108000*5
Total fixed Cost = $540,000
Fixed Cost $540,000
Add Operating income under variable costing $237,600
Contribution margin $777,600
Total units sold           97,200 (108000-10800)
contribution margin per unit $8 (777600/97200)
Breakeven point in units = Fixed Cost/contribution margin per unit
Breakeven point in units = 540000/8
Breakeven point in units =           67,500

ekkarill92 answered 2 years ago
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