(b) The factors that affect the breakeven point under absorption costing are 1. fixed (manufacturing and operating) costs. 2. contribution margin per unit. 3. production level in units in excess of breakeven sales in units. 4. denominator level chosen to set the fixed manufacturing cost rate.
9-9Examples of dysfunctional decisions managers may make to increase reported operating income are:
9-10Approaches used to reduce the negative aspects associated with using absorption costing include:
c.Include nonfinancial as well as financial variables in the measures used to evaluate performance. 9-11The theoretical capacityand practical capacitydenominator-level concepts emphasize what a plant can supply. The normal capacity utilizationand master-budget capacity utilizationconcepts emphasize what customers demand for products produced by a plant.9-12The downward demand spiralis the continuing reduction in demand for a company’s product that occurs when the prices of competitors’ products are not met, and (as demand drops further) higher and higher unit costs result in more and more reluctance to meet competitors’ prices. Pricing decisions need to consider competitors and customers as well as costs. 9-13No. It depends on how a company handles the production-volume variance in the end-of-period financial statements. For example, if the adjusted allocation-rate approach is used, each denominator-level capacity concept will give the same financial statement numbers at year-end. 9-14For tax reporting in the United States, the IRS requires only that indirect production costs are “fairly” apportioned among all items produced. Overhead rates based on normal or master-budget capacity utilization, as well as the practical capacity concept, are permitted. At year-end,