Net Income. Sales Under Break-Even Point
I am asked to write a memorandum explaining how a company could report net income when it sold less than its break-even volume in units. Here's the info. :
"In the company's planning documents, John, the company's president reports that the break-even volume (in units) for the company is 21,739 units. This break-even point is computed as follows.
break-even volume= total fixed cost/ contribution margin per unit
$500,000 / $23 = 21,739 units
Total fixed cost consists of $300,000 in fixed production cost and $200,000 in fixed selling and administrative expenses. The contribution margin per unit of $23 is computed by deducting the $17 variable cost per unit (which consists of $15 in variable production cost and $2 in variable selling and administrative cost) from $40 sales price per unit. In 2007, the company sold 20,000 units, which was below break-even, and John was concerned that the company's income statement would show a net loss. To his surprise, the company's 2007 income statement revealed a net income of $60,000."
I don't really know how to explain this... because I don't understand how can this happen. Please, if any of you guys can help I will REALLY appreciate it.