Question

Genuine Spice Inc. began operations on January 1 of the current year. The company produces eight-ounce bottles of hand and body lotion called Eternal Beauty. The lotion is sold wholesale in 12-bottle cases for $100 per case. There is a selling commission of $20 per case. The January direct materials, direct labor, and factory overhead costs are as follows: DIRECT MATERIALS Cost Behavior Units per Case Cost per Unit Cost per Case Cream base Variable 100 oz. $0.02 $ 2.00 Natural oils Variable 30 oz. 0.30 9.00 Bottle (8-oz.) Variable 12 bottles 0.50 6.00 $17.00 DIRECT LABOR Department Cost Behavior Time per Case Labor Rate per Hour Cost per Case Mixing Variable 20 min. $18.00 $6.00

Answer 1

Part A

1.

	At the High Point	At the Low Point
Variable cost per unit	$                       0.20	$                      0.20
Total fixed cost	$                        500	$                       500
Total cost	$                        740	$                       600

Working:

Variable utility cost = ($740 - $600)/(1200 - 500) = $140/700 = $0.20 per case

Fixed cost (at the high point) = $740 - ($0.20 x 1200) = $740 - $240 = $500

Fixed cost (at the low point) = $600 - ($0.20 x 500) = $600 - $100 = $500

2. Contribution margin per case: $55.60

Sales price per case $		100.00
Less: Variable costs
Direct materials	17.00
Direct labor	7.20
Factory overhead (Utilities)	0.20
Selling commission	20.00
Total variable costs per case $		44.40
Contribution margin per case $		55.60

3.

1	Total fixed costs:
2	Utilities	500
3	Factory lease	14000
4	Equipment depreciation	4300
5	Supplies	660
6	Total fixed costs $	19460

4. Break-even number of cases per month: 350

Break-even (units) = Total fixed costs/Contribution margin per unit = $19460/$55.60 = 350 cases

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