Variable and absorption costing and breakeven points Tammy Cat Tree Co (TCTC) builds luxury cat trees and sells them through the Internet to cat owners who want to provide their cats with a more natural environment. At the start of 2008, TCTC carried no inventory. During the year, they produced 1,000 cat trees and sold 800 cat trees for $300 each. Fixed production costs were $100,000 and variable production costs were $75 per cat tree. Fixed advertising, Web page and other general and administrative expenses were $50,000 and variable shipping costs were $25 per tree.

1. Prepare an income statement assuming TCTC uses:

a. Variable costing

b. Absorption costing.

2. Compute the breakeven point in units assuming TCTC uses:

a. Variable costing

b. Absorption costing.

3. Due to recent changes in local conservation laws, the price of the wood used in the cat trees is expected to increase by $25 for each tree. What effect would this have on the breakeven points calculated above?

4. Using the original data in the problem and the breakeven/target income formulas, show that it would be necessary to sell 800 cat trees to earn the income calculated in requirements la and lb above.