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Monthly break-even point in units of product

Parkins Company produces and sells a single product. The company's income statement for the most recent month is given below:
Sales (6,000 units at $40 per unit) $240,000
Less manufacturing costs:
Direct materials $48,000
Direct labor (variable) 60,000
Variable factory overhead 12,000
Fixed factory overhead 30,000 150,000
Gross margin 90,000
Less selling and other expenses:
Variable selling and other expenses 24,000
Fixed selling and other expenses 42,000 66,000
Net operating income $ 24,000
There are no beginning or ending inventories.

Required:
a. Compute the company's monthly break-even point in units of product.
b. What would the company's monthly net operating income be if sales increased by 25% and there is no change in total fixed expenses?
c. What dollar sales must the company achieve in order to earn a net operating income of $50,000 per month?
d. The company has decided to automate a portion of its operations. The change will reduce direct labor costs per unit by 40 percent, but it will double the costs for fixed factory overhead. Compute the new break-even point in units.

HJ Turner Corporation produces a single product. Data concerning the company's operations last year appear below:

Units in beginning inventory 0
Units produced 10,000
Units sold 9,000

Selling price per unit $60

Variable costs per unit:
Direct materials $15
Direct labor $5
Variable manufacturing overhead $2
Variable selling and administrative $4
Fixed costs in total:
Fixed manufacturing overhead $200,000
Fixed selling and administrative $70,000

Assume direct labor is a variable cost.

Required:
a. Compute the unit product cost under both absorption and variable costing.
b. Prepare an income statement for the year using absorption costing.
c. Prepare an income statement for the year using variable costing.
d. Prepare a report reconciling the difference in net operating income between absorption and variable costing for the year.

Solution Preview

Parkins Company produces and sells a single product. The company's income statement for the most recent month is given below:
Sales (6,000 units at $40 per unit) $240,000
Less manufacturing costs:
Direct materials $48,000
Direct labor (variable) 60,000
Variable factory overhead 12,000
Fixed factory overhead 30,000 150,000
Gross margin 90,000
Less selling and other expenses:
Variable selling and other expenses 24,000
Fixed selling and other expenses 42,000 66,000
Net operating income $ 24,000
There are no beginning or ending inventories.

Required:
a. Compute the company's monthly break-even point in units of product.

First, we must find the selling price and variable costs per unit.

Sales (6,000 units at $40 per unit) $40
Variable costs:
Direct materials ($48,000/6,000 units) 8
Direct labor ($60,000/6,000 units) 10
Variable factory overhead ($12,000/6,000 units) 2
Variable selling and other expenses
($24,000/6,000 units) ................... 4 24

Fixed costs:
Fixed selling and other expenses 42,000
Fixed factory overhead 30,000 72,000

Then, we will find the Contribution Margin per Unit (CMU) as follows: -

CMU = Sales price per unit - variable cost per unit
CMU = 40 - 24
= 16

Then, we can find the break-even point in units by using the following contribution margin equation.

We will designate X to represent unit sales.

X = total fixed costs + net income
CMU

X = $72,000 + $0
16

X = 4,500 units

b. What would the company's monthly net operating income be if sales increased by 25% and there is no change in total fixed expenses? ...

Solution Summary

This solution is comprised of a detailed explanation to compute the company's monthly break-even point in units of product, answer what would the company's monthly net operating income be if sales increased by 25% and there is no change in total fixed expenses, what dollar sales must the company achieve in order to earn a net operating income of $50,000 per month, compute the unit product cost under both absorption and variable costing, prepare an income statement for the year using absorption costing and variable costing, and prepare a report reconciling the difference in net operating income between absorption and variable costing for the year.

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