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

1) Break even units = fixed costs / weigheted average contribution margin per unit

Using the conventional approach, we will allocate the overhead costs on the basis of direct labour hours to each Rose and Violet cases.

Contribution margin for each product

	Rose	Violet
Selling price	$100.00	$80.00
Material cost per case	$50	$43
DL cost per case	$10	$7
Direct labour benefits	$3.43	$2.86
Machine costs per case	$4.49	$3.74
Total variable cost per case	$67.92	$56.60
Contribution margin	$32.08	$23.40

Break even point = fixed costs / contribution margin

Fixed costs for each product

	Rose	Violet
Machine costs	$1,71,428.57	$28,571.43
Receiving deparment	$1,92,857.14	$32,142.86
Packing department	$1,07,142.86	$17,857.14
Total fixed costs	$4,71,428.57	$78,571.43

Break even units for Rose = 471428.57 / 32.08

= 14695 units

Break even units for Violet = 78571.43 / 23.4

= 3358 units

2) Under the activity based costing method, we will allocate the overhead costs on the basis of the cost driver. So for direct labor benefits we will use direct labour hours and for machine costs we will use machine hours as the base.

	Rose	Violet
Selling price	$100.00	$80.00
Material cost per case	$50.00	$43.00
DL cost per case	$10.00	$7.00
Direct labour benefits	$3.43	$2.86
Machine costs per case	$4.03	$6.05
Total variable cost per case	$67.46	$58.90
Contribution margin	$32.54	$21.10

Fixed costs on the basis of ABC

	Rose	Violet
Machine costs	$1,53,846.15	$46,153.85
Receiving deparment	$1,50,000.00	$75,000.00
Packing department	$83,333.33	$41,666.67
Total fixed costs	$3,87,179.49	$1,62,820.51

Break even cases of Rose = 387179.49 / 32.54

= 11898 cases

Break even cases of Violet = 162820.51 / 21.1

= 7718 cases