Chapter 4, Problem 4.18P

To determine

Concept introduction:

Break-even point (BEP):

Break-Even point or BEP is the level of output at which the total sales is equal to the total cost. The BEP means there are no operating income and no operating losses. It is a very important management tool as the management use this point as the minimum sales required for business survival.

Requirement 1:

Calculate the company’s break-even point in units.

To determine

Concept introduction:

Variable costing:

The method of costing where only variable costs are charged to the products is called as variable costing. The fixed overheads are charged to the units which are sold.

Requirement 2:

Calculate the product cost and prepare the income statement for Year 1, Year 2 and Year 3.

To determine

Concept introduction:

Absorption costing:

The method of costing where both fixed and variable costs are charged to the products Absorption costing absorbs the costs which are directly related to the product. The fixed overheads are charged to all units manufactured regardless of the output.

Requirement 3:

Calculate the product cost and prepare the income statement for Year 1, Year 2 and Year 3.

To determine

Concept introduction:

Cost-volume-profit analysis:

This analysis focuses on the cost and volume of the product in order to calculate the operating profit. This analysis calculates the change in the operating product by the change in the cost and volume of the product.

Requirement 4:

Compare the net operating income calculated in requirement 2 and 3 with the break-even point.