EXERCISE 7-9 (20 MINUTES)

2. The break-even point under variable costing would be:

Fixed costs

Break-even point =

Unit contribution margin

$760,000 $760,000

= = = 76,000 units

$25-($9+$6) $10 per unit

On the surface this answer appears to be incorrect, since the company

sold less than 76,000 units in both July and August and yet showed a

profit in both months on the absorption costing statements. In fact,

when a student gives an answer of 76,000 units as the break-even

point, you should ask, “How can 76,000 units be the break-even point

when the company sold only 70,000 units in July and 75,000 units in

August and reported a profit in both months?”

The answer to this apparent inconsistency is that production exceeded

sales in both July and August. This resulted in deferring a portion of the

fixed manufacturing overhead costs of these months to the future rather

than showing the cost as an expense on the income statement. In each

month, this deferral of fixed manufacturing overhead cost was large

enough to permit the company to report a profit, even though less than

the break-even volume of units was sold.