Question

Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	20
Direct labor	$	12
Variable manufacturing overhead	$	3
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	390,000
Fixed selling and administrative expenses	$	210,000

During its first year of operations, Haas produced 50,000 units and sold 50,000 units. During its second year of operations, it produced 65,000 units and sold 40,000 units. In its third year, Haas produced 30,000 units and sold 55,000 units. The selling price of the company’s product is $48 per unit.

Required:

1. Compute the company’s break-even point in unit sales.

2. Assume the company uses variable costing:

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

3. Assume the company uses absorption costing:

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

Answer 1

Answer:

1. Break-even point in unit sales

Formula, Break even point in units = Fixed Cost / Contribution per unit

Here, Contribution per unit is calculated as follows:

Particulars	Per Unit ($)
Sales	48
Less: Variable Costs
Direct Material	20
Direct Labour	12
Variable Manufacturing overheads	3
Variable selling and administrative	1
Contribution per unit	12

Also, Total Fixed Costs = 6,00,000 (3,90,000 + 2,10,000)

Hence, Breakeven point (Units) = 6,00,000 / 12 = 50,000 Units.