Question

Accounting 311 In class #1 Based on Case 5-64 in text 5-64. Cost Estimation, CVP Analysis, and Decision Making (LO 5-4.5.8) Luke Corporation produces a variety of products, each within their own division. Last year, the managers at Luke developed and began marketing a new chewing gum, Bubbs, to sell in vending machines. The product, which sells for $5.25 per case, has not had the market success that managers expected and the company is considering dropping Bubbs. The product-line income statement for the past 12 months follows: Table 1 $14,682,150 Revenue Costs Manufacturing costs Allocated corporate costs (@5%)... Product-line margin.... Allowance for tax (20%)... Product-line profit (loss).......... $14,440,395 734,108 15.174,503 $ (492.353) 98,470 $ (393.883) All products at Luke receive an allocation of corporate overhead costs, which is computed as 5 percent of product revenue. The 5 percent rate is computed based on the most recent year's corporate cost as a percentage of revenue. Data on corporate costs and revenues for the past two years follow: Table 2 Corporate Revenue Corporate Overhead Costs Most recent year.... Previous year....... $106.750.000 $ 76,200,000 $5,337,500 4,221,000 Roy O. Andre, the product manager for Bubbs, is concerned about whether the product will be dropped by the company and has employed you as a financial consultant to help with some analysis. In addition to the information given above, Mr. Andre provides you with the following data on product costs for Bubbs

Answer 1

1. Number of cases sold = Total Revenue / Selling price per case
= $14682150/5.25 = 2,796,600 cases

2. Variable overhead cost per sales dollar = ($5337500-4221000)/(106750000-76200000) = $0.03655 per sales dollar

3. Variable overhead cost per case = (Cost at highest activity - Cost at lowest activity) / (Highest activity - Lowest Activity)
= ($1272451-1139828)/(259200-207000) = $2.54067 per case

4. Fixed Overhead Cost = $1139828 - 207000 x $2.54067 = $613909

5. Variable overhead cost per case = $2.236 per case

6. Fixed overhead cost nearest to $100 = $682300

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