Question

Abbott Lamp Corporation manufactures Mountain Dew Lamps.   Abbott Lamp Corporation has the following historical cost behavior data:

Year	Total Direct Labor Hours	Total Utilities	Total Indirct Labor	Total Indirct Materials	Total Mixed OH costs
2014	100	$125	$400	$175	$700
2015	150	$175	$550	$225	$950
2016	200	$225	$700	$275	$1,200
2017	350	$375	$1,150	$425	$1,950

Other 2018 estimated information is as follows:

Rent on production facility                 $100

Factory supervisor salary                    $100

Depreciation on factory equipment    $200

Rent on corporate headquarters          $300

Corporate HQ salaries                         $1,000

Total                                                    $1,700

Abbott Lamp also estimates the following with regard to direct materials and direct labor:

Direct Materials:

1 mountain can/mountain dew lamp @ $2/mountain dew can;

.25 pieces of paper/mountain dew lamp @$4/piece of paper;

Direct Labor

.2 dlh/mountain dew lamp @ $10/dlh

Abbott Lamp Corporation manufactures Mountain Dew Lamps.   Abbott Lamp Corporation has the following historical cost behavior data:

Year	Total Direct Labor Hours	Total Utilities	Total Indirct Labor	Total Indirct Materials	Total Mixed OH costs
2014	100	$125	$400	$175	$700
2015	150	$175	$550	$225	$950
2016	200	$225	$700	$275	$1,200
2017	350	$375	$1,150	$425	$1,950

Other 2018 estimated information is as follows:

Rent on production facility                 $100

Factory supervisor salary                    $100

Depreciation on factory equipment    $200

Rent on corporate headquarters          $300

Corporate HQ salaries                         $1,000

Total                                                    $1,700

Abbott Lamp also estimates the following with regard to direct materials and direct labor:

Direct Materials:

1 mountain can/mountain dew lamp @ $2/mountain dew can;

.25 pieces of paper/mountain dew lamp @$4/piece of paper;

Direct Labor

.2 dlh/mountain dew lamp @ $10/dlh

1. A. Estimate the VARIABLE predetermined overhead rate using the high-low method. Using the high-low method, what does the y-intercept ‘mean’ in this case?

B. Using your answer from 1 above (using BOTH the VPDOH and the y-intercept), compute the breakeven point in terms of total # of mountain dew lamps that need to be sold to break even. Assume that the price per Mountain Dew Lamp is $20/mountain dew lamp and that capacity is NOT an issue.

C. Calculate the # of mountain dew lamps that must be sold in order to achieve a goal operating income of $10,000 (and still use your answer from part 1 above);

Answer 1

A. Variable predetermined overhead rate: $5 per direct labor hour

Working:

	Total Direct Labor Hours	Total Mixed OH Costs
High activity level	350	$            1,950
Low activity level	100	$                700
Change	250	$            1,250

Variable cost per unit = $1250/250 = $5

Fixed cost (at high level) = $1950 - (350 x $5) = $1950 - $1750 = $200

Fixed cost (at low level) = $700 - (100 x $5) = $700 - $500 = $200

Fixed overhead	200
Rent on production facility	100
Factory supervisor salary	100
Depreciation on factory equipment	200
Rent on corporate headquarters	300
Corporate HQ salaries	1000
Total fixed costs $	1900

y-intercept: $1900

The y-intercept means the total fixed costs.

B. Break-even point (units) = Fixed costs/Contribution per unit

Sales price per unit		20
Variable costs:
Direct materials
1 mountain can	2
0.25 pieces of paper (0.25 x $4)	1
Direct labor (0.2 x $10)	2
Variable overhead (0.2 x $5)	1
Total variable costs		6
Contribution margin per unit $		14

Break-even point = $1900/$14 = 135.71 = 136 lamps

C. Number of lamps to be sold = (Fixed costs + Desired profit)/Contribution margin per unit = ($1900 + $10000)/$14 = $11900/$14 = 850 lamps