Question

Comprehensive Problem 5
Part A:

Note: You must complete part A before completing parts B and C.

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 Direct Materials Cost per Case Cream base Variable 100 ozs. $0.02 $2.00 Natural oils Variable 30 ozs. 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 Direct Labor Cost per Case Mixing Variable 20 min. $18.00 $6.00 Filling Variable 5 14.40 1.20 25 min. $7.20 FACTORY OVERHEAD Cost Behavior Total Cost Utilities Mixed $600 Facility lease Fixed 14,000 Equipment depreciation Fixed 4,300 Supplies Fixed 660 $19,560

Part A—Break-Even Analysis

The management of Genuine Spice Inc. wants to determine the number of cases required to break even per month. The utilities cost, which is part of factory overhead, is a mixed cost. The following information was gathered from the first six months of operation regarding this cost:

	Case Production	Utility Total Cost
January	500	$600
February	800	660
March	1,200	740
April	1,100	720
May	950	690
June	1,025	705

Required:

1. Determine the fixed and variable portion of the utility cost using the high-low method. Round the per unit cost to the nearest cent.

	At High Point	At Low Point
Variable cost per unit	$	$
Total fixed cost	$	$
Total cost	$	$

2. Determine the contribution margin per case. Enter your answer to the nearest cent.

Contribution margin per case $

3. Determine the fixed costs per month, including the utility fixed cost from part (1).

Utilities cost (from part 1)	$
Facility lease
Equipment depreciation
Supplies
Total fixed costs	$

4. Determine the break-even number of cases per month.
cases

Answer 1

Uisng high low method, variable cost per unit = (Highest Cost - Lowest Cost)/Difference in Cost
	At High Point	At Low Point
Total cost	740	600
Variable cost per unit	0.2	0.2
Total fixed cost	500	500
Total cost	740	600
Contribution Margin per case = Selling price per case - variable cost per case
55.6
Utilities cost (from part 1)	500
Facility lease	14000
Equipment depreciation	4300
Supplies	660
Total fixed costs	19460
Break even number of cases = Fixed costs/Contribution Margin per case
350	cases

Bc 1 Uisng high low method, variable cost per unit = (Highest Cost - Lowest Cost)/Difference in Cost 2 At High Point At Low Point 3 Total cost 740 600 4 Variable cost per unit =(B3-C3)/(1200-500) =B4 =B3-B4*1200 =C3-C4*500 5 6 Total fixed cost Total cost =B3 =C3 500 8 Contribution Margin per case = Selling price per case - variable cost per case 9 =100-20-17-7.2-0.2 10 11 Utilities cost (from part 1) 12 Facility lease 13 Equipment depreciation 14 Supplies 15 Total fixed costs 14000 4300 660 =SUM(B11:B14) 16 17 Break even number of cases = Fixed costs/Contribution Margin per case 18 =B15/A9 cases 19