Thomas Company sells products X, Y, and Z. Thomas sells
three units of X for each unit of Z, and two units of Y for each unit
of X. The contribution margins are $1.00 per unit of X, $1.50 per
unit of Y, and $3.00 per unit of Z. Fixed costs are $600,000. How
many units of X would Thomas sell at the break even point?
(b) The requirement is to determine how many units of
product X (one of three products) Thomas would sell at the
breakeven point. The solutions approach is first to find the number
of composite units to breakeven; a composite unit consists of
the number of units of each of the three products in the mix.
Since Thomas sells three units of X for each unit of Z and two
units of Y for each unit of X, they are selling six units of Y for each
unit of Z; therefore, a composite unit consists of 3X, 6Y, and 1Z.
The total contribution margin for one composite unit is
X (3) ($1.00) = $ 3
Y (6) ($1.50) = $ 9
Z (1) ($3.00) = $ 3
The breakeven point in terms of units of the product mix group is
$600,000 ??$15 = 40,000 composite units
Since there are three units of X in each composite unit, (40,000)
(3) or 120,000 units of X are sold at breakeven.
In calculating the breakeven point for a multiproduct company,
which of the following assumptions are commonly made
when variable costing is used?
I. Sales volume equals production volume.
II. Variable costs are constant per unit.
III. A given sales mix is maintained for all volume changes.
(c) Breakeven analysis is based upon several simplified
assumptions. Included in these assumptions is that variable costs
are constant per unit and, for a multiproduct company, that a
given sales mix is maintained for all volume changes. When absorption
costing is used, operating income is a function of both
production volume and sales volume. This is because an increase
in inventory levels causes fixed costs to be held in inventory while
a decrease in inventory levels causes fixed costs to be charged to
cost of goods sold. These fluctuations can dramatically affect
income and the breakeven point. On the other hand, when variable
costing is used the same amount of fixed costs will be deducted
from income whether or not inventory levels fluctuate.
As a result, the breakeven point will be the same even if production
does not equal sales. Hence, operating income under variable
costing is a function only of sales, and assumption I. is incorrect.
Using the variable costing method, which of the following
costs are assigned to inventory?
Variable selling and administrative costs . . . Variable factory overhead costs
(d) Under variable costing, both variable direct and
variable indirect manufacturing costs are assigned to inventory.
All fixed costs are considered sunk costs and thus are written off
as an expense of the period. Additionally, variable selling and
administrative costs are also treated as period costs and thus not
assigned to inventory.
A single-product company prepares income statements
using both absorption and variable costing methods. Manufacturing
overhead cost applied per unit produced in 2012 was the
same as in 2011. The 2012 variable costing statement reported a
profit whereas the 2012 absorption costing statement reported a
loss. The difference in reported income could be explained by
units produced in 2012 being
(a) The requirement is to determine what situation
would cause variable costing net income to be higher than absorption
costing net income. Answer (a) is correct because this
difference in reported income is explained if units produced in
2012 are less than units sold in 2012. This is true because under
variable costing, the amount of overhead included in cost of
goods sold is the amount applied in 2012 (since all units produced
were sold), whereas under absorption costing the overhead
released to cost of goods sold includes that applied in 2012
as well as overhead included in the 2011 year-end inventory.
Answer (b) is incorrect since a level of production lower than the
activity level used to allocate overhead would result in underapplied
overhead. Answer (c) is incorrect because the opposite
situation results in overapplied overhead. Answer (d) is incorrect
because production in excess of units sold would produce a
higher absorption costing income than the variable costing income.
Which of the following is an output of a financial planning
(c) The requirement is to identify the item that is an
output from a strategic plan. Answer (c) is correct. A financial
planning model is a mathematical model that attempts to forecast
future financial results. Sets of projected financial statements are
a major output from the model. Answer (a) is incorrect because
strategic plans drive the financial planning process and must be
developed before employing the financial planning model. Answers
(b) and (d) are incorrect because the planning model does
not provide outputs related to actual results.