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, 2016. The company produces a hand and body lotion in an eight-ounce bottle 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. wishes 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: 2016 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

1	Under High-low method, Select the highest and lowest activity
	High level activity		March	1200 cases produced
	Low level activity		Jan	500 cases produced
	Variable cost per unit=Change in total cost/Change in cases produced=(740-600)/(1200-500)=$ 0.20 per case
	Fixed cost=Total cot-(Cases produced* variable cost per unit)=600-(500*0.20)=$ 500
2	Contribution margin per case:
					$	$
	Sales price per case					100
	Less: Variable cost
	Sellig commission				20
	Direct materials:
	Cream base				2
	Natural oils				9
	Bottle				6
	Direct labor:
	Mixing				6
	Filling				1.2
	Factory overhead:
	Utilities				0.2	44.4
	Contribution margin per case					55.6
3	Fixed cost:
					$
	Utilities				500
	Facility lease				14000
	Equipment depreciation				4300
	Supplies				660
	Total Fixed cost				19460