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 100 oz $0.02 $2.00 Cream base Variable Natural oils Variable 30 oz. 0.30 9.00 6.00 Bottle (8-oz.) Variable 12 bottles 0.50 $17.00 DIRECT LABOR Department Cost Behavior Time per Case Labor Rate per Hour Cost per Case $18.00 $6.00 Mixing Variable 20 min.

Answer 1

1	Under high-low method,Highest and lowest level of activity is selected
	Highest activity=Case production of 1200 in Mar
	Lowest activity=Case production of 500 in Jan
	Variable cost per case=Change in total utility cost/Change in cases produced=(740-600)/(1200-500)=140/700=$ 0.20 per case
	Fixed cost=Total utility cost-(Cases produced*Variable cost per unit)
	Let's take case production of 500
	Fixed cost=600-(500*0.20)=600-100=$ 500
2	Contribution margin per case=Selling price-Variable costs
	Variable costs:
				$
	Direct materials			17
	Direct labor			7.2
	Utilities cost-Variable			0.2
	Selling commission			20
	Total			44.4
	Contribution margin per case=100-44.4=$ 55.6 per case
3	Fixed costs per month:
				$
	Utilities			500
	Facility lease			14000
	Equipment depreciation			4300
	Supplies			660
	Total			19460
4	Break-even number of cases per month=Fixed costs per month/Contribution margin per case=19460/55.6=350 cases
5			Production budget
						Cases
	Demand for the month					1500
	Plus: Desired finished goods inventory					175
	Total cases required					1675
	Less:Estimated finished goods inventory,August 1					300
	Cases to be produced					1375
6		Direct materials purchases budget
						Cream base (oz.)	Natural Oils (oz.)	Bottles (bottles)	Total
	Cases to be produced				a	1375	1375	1375
	Material required per case				b	100	30	12
	Total material required				a*b	137500	41250	16500
	Plus:Desired materials inventory,August 31					1000	360	240
	Less:Estimated materials inventory,August 1					250	290	600
	Direct materials to be purchased					138250	41320	16140
	x Cost per unit					0.02	0.3	0.5
	Direct materials purchase in $					2765	12396	8070	23231