“We Keep It in the Product Line Because It Absorbs Overhead”
I’ve heard, “We keep it in the product line because it absorbs overhead,” many times. Technically, any product or service will absorb overhead as long as its selling price exceeds the direct variable costs to produce and sell it. If the SP = $100 and direct costs (usually direct material and direct labor) = $90 the $10 difference (contribution margin) will absorb $10 in fixed overhead. If fixed OH is $100,000 the firm will need to sell 10,000 units to cover overhead just to break even.
Overhead is typically covered by allocating (spreading) its cost over the number of units or services produced. If a company cannot sell the break even volume it cannot cover its overhead. In the previous ...
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