Parker Products Inc, a manufacturer, reported $123 million in sales and a loss of $18 million in its annual report to shareholders. According to a CVP analysis prepared for management, the company�s break-even point is $115 million in sales.
Assuming that the CVP analysis is correct, is it likely that the company�s inventory level increased, decreased, or remained unchanged during the year?
Answer
IN the above sum we can see the sale were above the break even sales level and yet the company had loss. We can say that CVP analysis is based on variable costing and income that are reported to the shareholder of the company are based on the absorption costing, In this case sales were above the BEP level and as per variable costing net income must have been positive but as per absorption costing net operating income is negative and we could say that, this situation occurred when, inventories decreased and fixed manufacturing overhead deferred in inventories was released to the income statement on the absorption costing income statement. And this added Manufacturing O.H. cost will result in loss as per absorption costing even though , sales were above the BEP level
