Mertz Chemical has three divisions. Its consumer product division faces strong competition from companies overseas. During its recent teleconference, Ryan Peterson, the consumer product division manager, reported that his division's sales for the current year were below its break-even point. However, when the division's annual reports were received, Billie Mertz, the company president, was surprised that the consumer product division actually reported a profit of $264,000. How could this be possible?

Required

Assume that you work in the corporate controller's office. Write a one-half-page memorandum to the president explaining how the division can report income even if its sales are below the break-even point.