Question

Cases ANALYSIS. Adelle Watson owns a CASE 3.1 BEHAVIOR OF COST AND BREAKEVEN ANALYSIS. Adelle small manufacturing company, Easy Bake, which makes one product, a cerat Bake, which makes one product, a ceramic pie plate that reas tures even heating that helps prevent pie shells from gett helps prevent pie shells from getting burnt in patches. It is one of the pro ucts carried by most high-end kitchen stores throughout the United States. Even the everything she makes in a month, the product is not selling fast enough to generate a steady for Adelle. She has decided to hire you for $1.000 a month for three months to do a complete and ysis of her business. The first person you talk to is Joey Blake, the company accountant. He provides you with the following information for March: • Sales: 5,000 units • Total cost of production: $23,900 • Average cost of production: $4.78 • Average price: $5.00 When you ask Joey for more information on the costs of the company, you find out that all he has been doing is taking the total costs and dividing it by units made to get his cost numbers. You know there is a better way to do this, so you ask Joey to let you look at the books. He does so, providing you with the following information: Volume Sold 5,000 4,000 3,000 Materials $6,250.00 $5,000.00 $3.750.00 Easy Bake's Costs for Varying Volumes Direct Labor Supplies Indirect Labor Electricity Depreciation $2,500.00 $750.00 $3,000.00 $1,500.00 $2,900.00 $2,000.00 $600.00 $2,900.00 $1,300.00 $2,900.00 $1,500.00 $450.00 $2,800.00 $1,100.00 $2,900.00 Other Overhead $3,500.00 $3,200.00 $2,900.00 Rent $3,500.00 $3,500.00 $3,500.00 After completing some basic analysis, you suggest to Adelle that she drop her price by 10% to increase demand. You also make some suggestions about variable costs and fixed costs. Adelle is nervous, but she goes along with your suggestions. It takes a month to make all of the changes you recommend. Before your salary is added, Joey gives you the following results for April and May: Other Indirect Labor Volume Sold 5,500 6,000 Materials $5,500 $6,000 Direct Labor $2,200 $2,400 Supplies $550 $600 April May Electricity $1,600 $1,700 $3,050 $3,100 Depreciation $2,900 $2,900 Overhead $3,100 $3,200 Rent TOTALS $3,500 $22.400 $3,500 $23,400

I need help with these not sure where to start or how to structure this.

Answer 1

	Nature of the cost:
	Volume sold				a	5000	4000	3000
	Materials:
	Total cost				b	6250	5000	3750
	Variable cost per unit				b/a	1.25	1.25	1.25
	Nature-Variable cost
	Direct labor:
	Total cost				c	2500	2000	1500
	Variable cost per unit				c/a	0.5	0.5	0.5
	Nature-Variable cost
	Supplies:
	Total cost				d	750	600	450
	Variable cost per unit				d/a	0.15	0.15	0.15
	Nature-Variable cost
	Indirect labor:
	Total cost				e	3000	2900	2800
	Variable cost per unit				e/a	0.6	0.725	0.933333
	Nature:
	Variable cost per unit			(Note:1)	0.1
	Fixed cost			(Note:1)	2500
	Electricity:
	Total cost				f	1500	1300	1100
	Variable cost per unit				f/a	0.3	0.325	0.366667
	Nature:
	Variable cost per unit			(Note:2)	0.2
	Fixed cost			(Note:2)	500
	Depreciation:
	Total cost					2900	2900	2900
	Nature-Fixed cost
	Other overhead:
	Total cost				g	3500	3200	2900
	Variable cost per unit				g/a	0.7	0.8	0.966667
	Nature:
	Variable cost per unit			(Note:3)	0.3
	Fixed cost			(Note:3)	2000
	Rent:
	Total cost					3500	3500	3500
	Nature-Fixed cost
	Note:1
	Variable cost per unit=Change in Total cost/Change in level of sales=(3000-2900)/(5000-4000)=100/1000=$ 0.10 per unit
	Consider 5000 units of sales,
	Fixed cost=Total cost-Total variable cost=3000-(5000*0.10)=3000-500=$ 2500
	Note:2
	Variable cost per unit=Change in Total cost/Change in level of sales=(1500-1300)/(5000-4000)=200/1000=$ 0.20 per unit
	Consider 5000 units of sales,
	Fixed cost=Total cost-Total variable cost=1500-(5000*0.20)=1500-1000=$ 500
	Note:3
	Variable cost per unit=Change in Total cost/Change in level of sales=(3500-3200)/(5000-4000)=300/1000=$ 0.30 per unit
	Consider 5000 units of sales,
	Fixed cost=Total cost-Total variable cost=3500-(5000*0.30)=3500-1500=$ 2000
a.	Cost formula,Total cost=(Number of units sold*Variable cost per unit)+Fixed cost
	Let's assume number of units sold=x
	Fixed cost:
			$
	Indirect labor		2500
	Electricity		500
	Depreciation		2900
	Other overhead		2000
	Rent		3500
	Total		11400
	Variable cost per unit:
			$
	Materials		1.25
	Direct labor		0.5
	Supplies		0.15
	Indirect labor		0.1
	Electricity		0.2
	Other overhead		0.3
	Total		2.5