APPENOX # 849 Appendix Breakeven Points in Variable Costing and Absorption Costing Chapter 3 introduced cost-volume-profit analysis. If variable costing is used, the breakeven point (thar's where oper ating income is $0) is computed in the usual manner. There is only one breakeven point in this case, and it depends on (1) fixed (manufacturing and operating) costs and (2) contribution margin per unit The formula for computing the breakeven point under variable costing is a special case of the more general target operating income formula from Chapter 3 (p. 92): Lot @ = Numbor of urits sold to eam the target operating income costs + Target operating income Contribution margin per uit Breakeven occucs when the target operating income is $0. In our Stassen illustration for 2012 (see Exhibit 9-1, p. 326): ($1,080,000 + $1,380,000) + $0 00 (1,000 — (200 + $185} $615 = 4,000 units ‘We now verify that Stassen will achieve breakeven under variable costing by selling 4,000 units: Revenues, $1,000 x 4,000 units ‘4,000,000, Variable costs, $386 x 4000 units 1,540,000, Contribution margin, $15 x 4,000 units 72,460,000 Fixed costs 0 Operating income If absorption costing is used, the required number of units to be sold to earn a specific target operating income is not unique because of the number of variables involved. The following formula shows the factors that will affect the tar- get operating income under absorption costing: Total Target Fixed Breakeven Ging fixed + operating + | manufacturing x | sales — ON g = £2888_ineome costrate ——\ inunits —Pro“weed . Contribution margin per unit In this formula, the numerator is the sum of three terms (from the perspective of the two “+” signs), compared with ‘wo terms in the numerator of the variable-costing formula stated earlier. The additional term in the numerator under absorption costing is as follows: [Fanenentcuten x (retovenses Units } cost rate inunits produced This termi reduces the fixed costs that need to be recovered when units produced exceed the breakeven sales quantity ‘When production exceeds the breakeven sales quantity, some of the fixed manufacturing costs that are expensed under variable costing are not expensed under absorption costing; they are instead included in finished goods inventory:* For Stassen Company in 2012, suppose that actual production is 5,280 units. Then, one breakeven point, Q, under absorption costing is as follows: _ (81,080,000 + $1,380.00) + $0 + 18135 x (@ - 5,260) (1,000 ~ ($200 + $185)) {82,460,000 + $1350 ~ $712,800) S615 $1,747,200 + $1350 ssagoa = $1,747,200 a= 360 where proton flower thon the reskeven sles qn nat pose wes the firm ha opening provid the warble manufacturing cost prt snd he Fed macros tafe estan cin, the breskevenfoml ive sl vi