Question

Instructions:

Genuine Spice Inc. began operations on January 1 of the current year. The company produces 8-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
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	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:

Month	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

3.	Determine the fixed costs per month, including the utility fixed cost from part (1). Refer to the lists of Amount Descriptions for the exact wording of the answer choices for text entries.
4.	Determine the break-even number of cases per month.

Amount descriptions:

Amount Descriptions-Part A
Controllable variance
Equipment depreciation
Facility lease
Supplies
Utilities
Volume variance

3. Determine the fixed costs per month, including the utility fixed cost from part (1). Refer to the lists of Amount Descriptions for the exact wording of the answer choices for text entries.

1	Total fixed costs:
2	(Amount description): __________	____________
3	(Amount description): __________	_____________
4	(Amount description): __________	____________
5	(Amount description): __________	____________
6	(Amount description): __________	____________

4. Determine the break-even number of cases per month. ___________ cases

Answer 1

Part A

1.         Variable Cost per Unit = Difference in Total Cost / Difference in Production

            Variable Cost per Unit = $740 - $600 / 1,200 cases - 500 cases = $0.20 per case

            Total Cost = (Variable Cost per Unit × Units of Production) + Fixed Cost

At the high point:                                                      At the low point:

$740 = ($0.20 × 1,200 units) + Fixed Cost                $600 = ($0.20 × 500 units) + Fixed Cost

Fixed Cost = $500                                                      Fixed Cost = $500

2.

Selling price……………………………	$100.00
Less variable costs per case:	$17.00
Direct materials………………………
Direct labor……………………………	7.20
Utilities [see part (1)]………………	0.20
Selling expenses……………………		20.00
Total variable costs per case………		44.40
Contribution margin per case………	$ 55.60

3.         Total fixed costs:

Utilities [see part (1)]……………………………………	$500
Facility lease……………………………………………	14,000
Equipment depreciation………………………………	4,300
Supplies…………………………………………………		660
	$19,460

4.         Break-Even Sales (units) = Fixed Costs / Unit Contribution Margin

            Break-Even Sales (units) = $19460 / $55.60 = 350 cases