Question

Luke Corporation produces a variety of products, each within their own division. Last year, the managers at Luke developed and began marketing a new chewing gum, Bubbs, to sell in vending machines. The product, which sells for $5.60 per case, has not had the market success that managers expected and the company is considering dropping Bubbs.

The product-line income statement for the past 12 months follows:

Revenue				$	14,692,650
Costs
Manufacturing costs	$	14,443,895
Allocated corporate costs (@5%)		734,633			15,178,528
Product-line margin				$	(485,878	)
Allowance for tax (@20%)					97,175
Product-line profit (loss)				$	(388,703	)

All products at Luke receive an allocation of corporate overhead costs, which is computed as 5 percent of product revenue. The 5 percent rate is computed based on the most recent year’s corporate cost as a percentage of revenue. Data on corporate costs and revenues for the past two years follow:

	Corporate Revenue		Corporate Overhead Costs
Most recent year	$	113,750,000	$	5,687,500
Previous year	$	76,900,000		4,902,595

Roy O. Andre, the product manager for Bubbs, is concerned about whether the product will be dropped by the company and has employed you as a financial consultant to help with some analysis. In addition to the information given above, Mr. Andre provides you with the following data on product costs for Bubbs:

Month	Cases	Production Costs
1	213,500	$1,151,328
2	220,700	1,173,828
3	218,400	1,182,481
4	234,500	1,198,023
5	250,400	1,200,327
6	243,500	1,221,173
7	223,700	1,196,199
8	250,700	1,239,274
9	242,300	1,237,726
10	256,100	1,249,825
11	253,700	1,254,260
12	262,700	1,284,951

Required:

a. Bunk Stores has requested a quote for a special order of Bubbs. This order would not be subject to any corporate allocation (and would not affect corporate costs). What is the minimum price Mr. Andre can offer Bunk without reducing profit any further? (Round your answer to 2 decimal places.(i.e., 32.21))

b. How many cases of Bubbs does Luke have to sell in order to break even on the product? (Round variable cost percentage to 2 decimal places, fixed costs to whole dollar amount and profit per case to 3 decimal places for intermediate calculations. Round your final answer up to the nearest whole unit.)

c. Suppose Luke has a requirement that all products have to earn 5 percent of sales (before tax after corporate allocations) or they will be dropped. How many cases of Bubbs does Mr. Andre need to sell to avoid seeing Bubbs dropped? (Round your minimum price per case to 2 decimal places and do not round your other intermediate calculations. Round your final answer up to the nearest whole unit.)

d. Assume all costs and prices will be the same in the next year. If Luke drops Bubbs, how much will Luke’s profits increase or decrease? Assume that fixed production costs can be avoided if Bubbs is dropped. (Use variable cost percentage to 2 decimal places. Round intermediate calculations and final answers to nearest whole dollar amount.)

Answer 1

1) first we clculate fixed prodcution cost and variable production cost using high low method

Cases production cost
High 12 262,700 $1,284,951
low 1 213,500 $1,151,328
diffrence 49200 $133623
Variable cost per unit = $133623/49200 = 2.72 cost per unit

Total fixed cost per month = $1284951 in this cost fixed cost and variable cost both are include

= 1284951- (262700*2.72)

=1284951-7134544= $ 570407 this portion is fixed cost for month

a)so the minimum price equal to the variable cost production cost = 2.72 per unit

b) Break-even point in units = fixed cost / Sale price per unit -variable cost per unit

=revenues – variable product costs – variable corporate costs

corporate overhead costs, which is computed as 5 percent of product revenue.

= $5.60-((2.72- (5.60*5%)) = 2.6 per unit (this is conribution per unit )

BEP = $570407*12 / 2.6 per unit = 2632648 cases per year

(here in the fixed cost we multipy by 12 because this fixed cost is for monthly , and our calculation for annualy )

c)

Profit = revenues – variable product costs – variable corporate costs – fixed product costs

5.60*5% * quantity = 5.60Q - 2.72Q - (5%*5.60Q) - 570407*12

2.32Q = 6844884

Q = 2950382 cases per year

d) If Luke drops Bubbs, how much will Luke’s profits increase or decrease? Assume that fixed production costs can be avoided if Bubbs is dropped.

Lost Revenue $(14,692,650)
Product Cost Avoided $14,443,895
drop in profit $(248755)
so the profit will decreseshere not consider corporate costs because it will not be avoided, but rather just reallocated:

thanks