Refer to information about Dowell Company in Problem 19-1A. In the company's planning documents, Kyra Dowell, the company's president, reports that the break-even volume (in units) for the company is 24,000 units. This break-even point is computed as follows.
Break-even volume = Total fixed cost / Contribution margin per unit = $540,000/$22.50 = 24,000 units.
Total fixed cost consists of $300,000 in fixed production cost and $240,000 in fixed selling and administrative expenses. The Contribution margin per unit of $22.50 is computed by deducting the $23.50 variable cost per unit (which consists of $21 in variable production cost and $2.50 in variable selling and administrative cost) from the $46 sales price per unit. In 2012, the company sold 20,000 units, which was below break-even, and Kyra was concerned that the company's income statement would show a net loss. To her surprise, the company's 2012 income statement revealed a net income of $10,000 as shown in Problem 19-1A.
Required
Prepare a one-half-page memorandum to the president explaining how the company could report net income when it sold less than its break-even volume in units.