Question

​Eartha, a leading firm in the sports​ industry, produces basketballs for the consumer market. For the year ended December​ 31 2017, Eartha sold 206,200 basketballs at an average selling price of 26 per unit. The following information also relates to 2017 ​(assume constant unit costs and no variances of any​ kind)

Inventory, January 1, 2017: 32,800 basketballs

Inventory, December 31, 2017: 26,600 basketballs

Fixed manufacturing costs: $1,400,000

Fixed administrative costs: $821,700

Direct materials costs: $7 per basketball

Direct labor costs: $6 per basketball

1.	Calculate the breakeven point​ (in basketballs​ sold) in 2017 ​under:
	a.	Variable costing
	b.	Absorption costing
2.	Suppose direct materials costs were $10 per basketball instead. Assuming all other data are the​ same, calculate the minimum number of basketballs Eartha must have sold in 2017 to attain a target operating income of $150,000 ​under:
	a.	Variable costing
	b.	Absorption costing

Answer 1

Hey there heres the solution :)

1)A) Breakeven point using variable costing

SALES 26
LESS DIRECT MATERIAL (7)
LESS DIRECT LABOR (6)
CONTRIBUTION MARGIN	13

BEP=FIXED COST/CONTRIBUTION MARGIN

TOTAL FIXED COST=$2221700($1400000+$821700)

BEP=2221700/13=170900.UNITS

B)UNDER ABSORPTION COSTING

SALES 26
LESS DIRECT MATERIAL (7)
LESS DIRECT LABOR (6)
LESS MANFACTRING FIXED COST PER UNIT (6.78)
CONTRIBTION MARGIN NDER ABSORPTION COSTING	6.22

BEP=FIXED COST/CONTRIBTION MARGIN UNDER ABSORPTION COSTING =2221700/6.22=357186.495 UNITS

2)A) SALE-VARIABLE COST-FIXED COST=OPERATING INCOME

LET NUMBER OF UNITS TO BE SOLD BE X

(26-10-6)X-2221700=150000

=10X-2221700=150000

X=237170.UNITS TO BE SOLD TO ATTAIN A PROFIT OF 150000.

B) UNDER ABSORPTION COSTING

(26-10-6-6.78)X-2221700=150000

3.22X=2371700

X=736553(APPROX) UNITS TO BE SOLD TO ATTAIN A PROFIT OF 150000.

HOPE THIS HELPS :)