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) 50,000 10,000 Selling price per case $100 $80 Direct labor hours 36,000 6,000 Machine hours 10,000 3,000 Receiving orders 50 25 Packing orders 100 50 Material cost per case $50 $43 Direct labor cost per case $10 $7 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 $ — $200,000 Machine costs 200,000* 262,000 Receiving department 225,000 — Packing department 125,000 — Total costs $550,000 $462,000 * 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 _cases Break-even cases of Violet _cases 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 _cases Break-even cases of Violet _cases

Answer 1

• All working forms part of the answer
• When conventional method is used:

---All overheads will be allocated using direct labor hours.
---Variable overheads will form part of Variable cost.

• When ABC method is used:

---Fixed as well as variable overheads will be allocated to product using activity rates.
---Both will not be considered for calculating unit contribution.

• Working:

Sales Mix = 50000 units Rose and 10000 units Violet = 60000 units.
Rose = 50000/60000 = 83.33%
violet = 10000/60000 = 16.67%

Break Even point = Fixed Cost /Weighted average unit contribution

• Requirement 1: Break Even Conventional Method

Total Variable Overhead = $ 462,000
Total DLH = 36000 + 6000 = 42000
variable overhead rate = 462000 / 42000 = $ 11 per DLH

		Rose	Violet
A	Variable overhead rate per DLH	$                   11.00	$                             11.00
B	DLH per unit	0.72 [36000/50000 units]	0.6 [6000/10000 units]
C=AxB	Variable overhead per case	$                     7.92	$                               6.60
D	Material cost per case	$                   50.00	$                             43.00
E	Direct Labor cost per case	$                   10.00	$                               7.00
F=C+D+E	Total variable cost per case	$                   67.92	$                             56.60
G	SP per case	$                 100.00	$                             80.00
H=G-F	Unit Contribution margin	$                   32.08	$                             23.40
I	Sales Mix	83.33%	16.67%
J=HxI	Weighted Unit Contribution	$                   26.73	$                               3.90
K	Fixed Cost	$       5,50,000.00
L=J	Weighted Unit Contribution	$ 30.63	[26.73 + 3.9]
M=K/L	Total Break Even Cases	17954
N = M x 83.33%	Rose Break Even no. of cases	14962
O = M x 16.67%	Violet Break Even no. of cases	2992

• Requirement 2: Break Even using Activity Based Costing

All Overheads = Fixed Cost

		Rose	Violet
A	Material cost per case	$                   50.00	$                             43.00
B	Direct Labor cost per case	$                   10.00	$                               7.00
C=A+B	Total variable cost per case	$                   60.00	$                             50.00
D	SP per case	$                 100.00	$                             80.00
E=D-C	Unit Contribution margin	$                   40.00	$                             30.00
F	Sales Mix	83.33%	16.67%
G=E x F	Weighted Unit Contribution	$                   33.33	$                               5.00
K	Fixed Cost	$     10,12,000.00	[550000 + 462000]
L=J	Weighted Unit Contribution	$                   38.33	[33.33 + 5]
M=K/L	Total Break Even Cases	26400
N = M x 83.33%	Rose Break Even no. of cases	22000
O = M x 16.67%	Violet Break Even no. of cases	4400