Question

a leading firm in the sports​ industry, produces basketballs for the consumer market. For the year ended December​ 31,

2017​,

Verena

sold

242,100

basketballs at an average selling price of

$41

per unit. The following information also relates to

2017

​(assume constant unit costs and no variances of any​ kind):

Inventory, January 1, 2017:

29,300 basketballs

Inventory, December 31, 2017:

27,200 basketballs

Fixed manufacturing costs:

$1,200,000

Fixed administrative costs:

$3,234,000

Direct materials costs:

$12 per basketball

Direct labor costs:

$9 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 $16 per basketball instead. Assuming all other data are the​ same, calculate the minimum number of basketballs Verena must have sold in 2017 to attain a target operating income of $110,000 ​under:
	a.	Variable costing
	b.	Absorption costing

Answer 1

1) Calculate the breakeven point​ (in basketballs​ sold) in 2017
Fixed manufacturing costs:	$1,200,000
Fixed administrative costs:	$3,234,000
Total	$4,434,000
Selling Price	$41
Less: Direct materials costs:	($12)
Less: Direct labor costs:	($9)
Contribution Margin	$20
Break even point under variable costing= Total fixed expenses/Contribution margin per unit
Break even point under variable costing=  $,4,434,000/$20	221,700.00	Units
Absorption Costing
Selling Price	$41
Less: Direct materials costs:	($12)
Less: Direct labor costs:	($9)
Contribution Margin	$20
Less: fixed cost rate*	$          (5.00)
Adjusted CM	$15
Production = Sales + Ending Inventory - Beginning Inventory	240,000.00	units
* Fixed manufacturing cost rate = $1200000/240,000	$            5.00
BEP units = $3234000/$15	$ 215,600.00	units
Alternative method
BEP Units = [Total fixed costs + Target operating income + (Fixed manufacturing cost rate x (Breakeven sales - Units produced))]/ Contribution margin per unit
BEP Units( Q)  = 4434000 + 0 + (5 x (Q - 240,000)/ $20
20Q = 4434000 + 0 + 5Q - 1200000
15Q = 4434000 - 1200000
BEP Units( Q)  =	215,600.00	units
2)
Calculate the breakeven point​ (in basketballs​ sold) in 2017
Fixed manufacturing costs:	$1,200,000
Fixed administrative costs:	$3,234,000
Total	$4,434,000
Selling Price	$41
Less: Direct materials costs:	($16)
Less: Direct labor costs:	($9)
Contribution Margin	$16
Break even point under variable costing= Total fixed expenses + target profit /Contribution margin per unit
Break even point under variable costing=  ($,4,434,000 + $110,000)/$16	284,000.00	Units
Absorption Costing
Selling Price	$41
Less: Direct materials costs:	($16)
Less: Direct labor costs:	($9)
Contribution Margin	$16
Less: fixed cost rate*	$          (5.00)
Adjusted CM	$11
Production = Sales + Ending Inventory - Beginning Inventory	240,000.00	units
* Fixed manufacturing cost rate = $1200000/240,000	$            5.00
BEP units =( $3234000 + 110,000)/$11	304,000.00	units
Alternative method
BEP Units = [Total fixed costs + Target operating income + (Fixed manufacturing cost rate x (Breakeven sales - Units produced))]/ Contribution margin per unit
BEP Units( Q)  = 4434000 + 110,000 + (5 x (Q - 240,000)/ $16
16Q = 4434000 + 110,000 + 5Q - 1200000
11Q = 3344000
BEP Units( Q)  =	304,000.00	units