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    juaco_aaron's Avatar
    juaco_aaron Posts: 7, Reputation: 1
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    #1

    Oct 4, 2007, 11:54 AM
    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.
    Greentree101's Avatar
    Greentree101 Posts: 2, Reputation: 1
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    #2

    Oct 4, 2007, 12:14 PM
    haha try this.

    1. First, you need to do an analysis on how much the company should loss based on the planning documents.

    (20,000 units * estimated contribution margin) - fixed cost = (20,000*23) - 500,000= that will give you a loss of -40,000.

    meaning, based on their estimation with 20,000 unit sold, they will get a loss of -40,000.

    2. Find out how come there is a gain of $60,000 on the actual reports.

    (20,000*actual CM)-500,000=60,000. Do the math, you should get a CM of $28/Unit.

    If the price of $40/ unit remain unchange, then the Variable cost changed from 17 to 12, because that will give you a CM of (40-12=28).

    The conclusion is that all others thing remain unchanged, but the variable cost went down therefore, the CM went up.

    Do you understand?

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