Possible Reasons for Reporting Profit from Mertz Consumer Product Division.
There are many reasons why a division can report a profit, although their sales are below the break-even point. Some of the reasons behind these possibilities can be; large economies of scale in the company and erratic tabulation of the fixed and variable costs to mention a few.
Large economies of scale play the most significant impact, Mertz chemical is a big company with many divisions, and it can benefit from lowering its costs of production while increasing the quantity produced. The costs are spread across the various divisions decreasing the variables costs; hence profit can still be witnessed regardless of sales being below the break-even point, from a wrongful tabulation perspective. The values of the variable costs could have been erroneously entered. If the values of the variable costs are entered wrongfully, or omission is made to the final tally of the break-even point, then, the error margin can be significant and will show a profit.
The omission of variables will automatically give results with errors as it is not all-inclusive of all the costs incurred. Consequently, the same can happen if the fixed costs are erroneously entered in the tabulation of the break-even point. Fixed costs can either be omitted or entered incorrectly, once this has happened the break-even point will show an erratic profit which has not been achieved in the business. Conclusively, accuracy is vital in making entries as any form of error can be costly to the company as it gives wrongful reporting, which is misguiding.
In John’s post, he cited good control systems in the company to be a contributory factor to the profit recorded. That can be a reason, a good control system manages the variable costs by lowering their costs, and once these costs are reduced, the company will realize profits and that could have been a factor.