Variable and Absorption Costing and Profit at the Break-Even Point. The president of Schaucer Supply Company, Lola Schaucer, is surprised to learn that the company earned a profit in 1999 even though sales were at the break-even point.

"When we were going over the budget for 1999," she said, "I was told that we would have a poor year and could expect to break even with sales of only 206,000 units. Now, I find that we earned a modest pretax profit with sales of 206,000 units, although selling prices and costs were as budgeted. I am not complaining about a profit, mind you, but I can't understand how a profit can be made when operating at the break-even point."

Fixed production costs are applied to products at \(\$ 10\) per unit. The inventory of finished goods was 30,000 units on January 1, 1999, and 133,000 units on December 31, 1999. The marketing and administrative expenses were fixed at the amount of \(\$ 90,000\).
\section*{Required:}
1. Prepare an income statement for 1999 using absorption costing.
2. Prepare an income statement for 1999 using variable costing.
3. Explain to the president how a profit was made when using absorption costing even though sales were at the break-even point.
4. Explain whether the absorption costing income statement or the variable costing income statement gives the more realistic results.

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Data pertaining to 1999 are as follows: Unit selling price. Unit variable cost. Unit contribution margin $3,090,000 (fixed production cost) $15 (unit contribution margin) $35 $15 =206,000 units break even