Question

ABC and CVP Analysis: Multiple Products

Good Scent, Inc., produces two colognes: Rose and Violet. Of the two, Rose is more popular. Data concerning the two products follow:

	Rose	Violet
Expected sales (in cases)	51,000	10,200
Selling price per case	$103	$81
Direct labor hours	32,250	5,500
Machine hours	10,350	3,150
Receiving orders	50	27
Packing orders	102	55
Material cost per case	$50	$45
Direct labor cost per case	$9	$6

The company uses a conventional costing system and assigns overhead costs to products using direct labor hours. Annual overhead costs follow. They are classified as fixed or variable with respect to direct labor hours.

	Fixed		Variable
Direct labor benefits	$          —		$177,425
Machine costs	187,000*		237,825
Receiving department	210,500		—
Packing department	101,000		—
Total costs	$498,500		$415,250

^* All depreciation

Required:

1. Using the conventional approach, compute the number of cases of Rose and the number of cases of Violet that must be sold for the company to break even. In your computations, round variable unit cost to the nearest cent and round the number of break-even packages to the nearest whole number.

Break-even cases of Rose
Break-even cases of Violet

2. Using an activity-based approach, compute the number of cases of each product that must be sold for the company to break even. In your computations, round all computed amounts to the nearest cent and round the number of break-even packages to the nearest whole number.

Break-even cases of Rose
Break-even cases of Violet

Answer 1

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Good Scent, Inc.
Answer 1							Note
Allocation of costs on the basis of direct labor hours
Particulars	Rose	Violet	Total
Direct labor hours	32,250.00	5,500.00	37,750.00				A
Total Variable overhead			415,250.00				B
Direct labor hour rate for Variable overhead			11.00				C=A/B
Variable overhead allocated	354,750.00	60,500.00	415,250.00				D=C*A
Expected sales (in cases)	51,000.00	10,200.00					E
Variable overhead per case	6.96	5.93					F=D/E
Particulars	Rose	Violet	Total
Direct labor hours	32,250.00	5,500.00	37,750.00				See A
Total Fixed overhead			498,500.00				G
Direct labor hour rate for Fixed overhead			13.21				H=G/A
Fixed overhead allocated	425,870.86	72,629.14	498,500.00				I=H*A
Contribution margin income statement
Particulars	Rose	Violet	Total
Selling price per case	103.00	81.00
Material cost per case	50.00	45.00
Direct labor cost per case	9.00	6.00
Variable overhead per case	6.96	5.93					See F
Contribution per unit	37.04	24.07					J
Total Fixed overhead	425,870.86	72,629.14	498,500.00				See I
Breakeven (cases)	11,496.32	3,017.59	14,513.90				K=I/J
Answer 2		L	M	N	O=M+N	P=L/O
Calculation of ABC rates for variable overhead		Cost	Activity usage			ABC rates
Activity cost pool	Activity Measure	Cost	Rose	Violet	Total
Direct labor benefits	Direct labor hours	177,425.00	32,250.00	5,500.00	37,750.00	4.70
Machine costs	Machine hours	237,825.00	10,350.00	3,150.00	13,500.00	17.62
Total Cost assigned		415,250.00
		See P	See M	Q=P*M	See N	R=P*N
Allocation table			Rose		Violet
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned	Activity used	Cost assigned
Direct labor benefits	Direct labor hours	4.70	32,250.00	151,575.00	5,500.00	25,850.00
Machine costs	Machine hours	17.62	10,350.00	182,332.50	3,150.00	55,492.50
Total Cost assigned				333,907.50		81,342.50	S
Expected sales (in cases)				51,000.00		10,200.00	See E
Variable overhead per case				6.55		7.97	T=S/E
		U	V	W	X=V+W	Y=U/X
Calculation of ABC rates for Fixed overhead		Cost	Activity usage			ABC rates
Activity cost pool	Activity Measure	Cost	Rose	Violet	Total
Machine costs	Machine hours	187,000.00	10,350.00	3,150.00	13,500.00	13.85
Receiving department	Receiving orders	210,500.00	50.00	27.00	77.00	2,733.77
Packing department	Packing orders	101,000.00	102.00	55.00	157.00	643.31
Total Cost assigned		498,500.00
		See Y	See V	Z=Y*V	See W	AA=Y*W
Allocation table			Rose		Violet
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned	Activity used	Cost assigned
Machine costs	Machine hours	13.85	10,350.00	143,366.67	3,150.00	43,633.33
Receiving department	Receiving orders	2,733.77	50.00	136,688.31	27.00	73,811.69
Packing department	Packing orders	643.31	102.00	65,617.83	55.00	35,382.17
Total Cost assigned				345,672.81		152,827.19	AC
Contribution margin income statement
Particulars	Rose	Violet	Total
Selling price per case	103.00	81.00
Material cost per case	50.00	45.00
Direct labor cost per case	9.00	6.00
Variable overhead per case	6.55	7.97		See T
Contribution per unit	37.45	22.03		AB
Total Fixed overhead	345,672.81	152,827.19	498,500.00	See AC
Breakeven (cases)	9,229.56	6,938.73	16,168.29	AD=AC/AB