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

1. 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? Please answer number 2 question below and confirm calculation for Question 1 is correct.

   Variable predetermined overhead rate:    ($1950-$700)/(350dlh-100dlh)
   				$1250/250=$5.00dlh
   				$1950-($5.00dlh)*(350dlh)
   				$1950-$1750= $200
   Now, this predicts that for every dlh we incur, utilities will increase by $5.00.

2. 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.

Answer 1

	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

Variable predetermined overhead rate: $5 per direct labor hour

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.

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