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)	49,500	9,900
Selling price per case	$99	$80
Direct labor hours	33,700	6,000
Machine hours	9,050	3,500
Receiving orders	50	24
Packing orders	103	51
Material cost per case	$51	$41
Direct labor cost per case	$10	$5

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	$          —		$178,650
Machine costs	219,500*		218,350
Receiving department	232,000		—
Packing department	134,000		—
Total costs	$585,500		$397,000

^* 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

Traditional = we would bifurcate overhead on the basis of labor hours

	fixed	variable
Overhead	585500	397000
direct labor hours [33700+6000]	39700	39700
per direct labor hour	14.75[585500/39700]	10

allocated to rose =

fixed cost = 585500/39700*33700=497011$

variable =10*33700=337000

allocated to violet = 585500/39700*6000=88489$

variable 10*6000= 60000$

	Rose	violet
Overhead allocated variable per case	6.81$[337000/49500cases]	6.06$[60000/9900]
direct material	51$	41$
labor	10$	5$
Total variable	67.81	52.06
sale	99$	80$
contribution margin per case[sales-variable]	31.19$	27.94$
fiexd cost	497011	88489
break even units [fixed cost/contribution margin per unit]	15935[497011/31.19$]	3167[88489/27.94$]

2.ABC COSTING uses specific activities to allocate cost

we will allocate cost on the following bases

direct labor benefit	labor hours
machine cost	machine hours
receiving department	receiving orders
packing department	packing orders

	ROSE	VIOLET
VARIABLE COST per unit
DIRECT LABOR BENEFIT	3.06[178650/39700*33700]/49500units	2.73[178650/39700*6000]/9900units
machine cost	3.18[218350/12550Total machine hours]*9050 / 49500units	6.15[218350/12550]*3500/9900
direct labor	10	5
direct material	51	41
Total variable cost	67.24	54.88
sales price	99	80
contribution margin [ sales- variable cost]	31.76	25.12
Total fixed cost
fixed cost machine	158285[219500/12550]*9050	61215[219500/12550]*3500
receiving department	156757[232000/74receiving orders]*50	75243[232000/74]*24
packing department	89623[134000/154]*103	44377[134000/154]*51
Total fixed cost	404665[158285+156757+89623]	180835[61215+75243+44377]
break even units	12741[404665/31.76]	7199[180835/25.12]

total machien hours =9050+3500=12550

total receiving orders= 50+24

total packing =103+51=154