00 Sprint 6:12 PM 100% 1 + Genuine Spice Inc. began operations on January 1 of t

Question

00 Sprint 6:12 PM 100% 1 + Genuine Spice Inc. began operations on January 1 of the current year. The company produces eight-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 30 or 2 boties 050 Labor Rate Direct Laber 18.00 Cest Behavir Total Facility leane Part A-Break-Even Analys The management of Genuine Spice Inc. wants 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: is Case Preduction lity Total Cost ,100 April May Part A Instructions: 1. Determine the fixed and variable portion of the utility cost using the high-low method. Answer: S55.60 fixed cost from part (1). 2. Determine the contribution margin per case. 3. Determine the fixed costs per month, including the utility 4. Determine the break-even number of cases per month. During July of the current year, the management of Genuine and income statement budgets. Demand was expected to be Part B August Budgets: Spice Inc. asked the controller to prepare August manufacturing 1,500 cases at S100 per case for August. Inventory planning

Explanation / Answer

Part A:

1. High-low method – Variable cost:

(Utility cost at high point – Utility cost at low point) / (Volume at high point – Volume at low point) = ($740 - $600) / (1200 - 500) = $140 / 700 = $0.20

High-low method – Fixed cost:

Total utility cost at low point – Variable utility cost at low point = $600 – ($0.20 x 500) = $600 - $100 = $500

Total utility cost at high point – Variable utility cost at high point = $740 – ($0.20 x 1200) = $740 - $240 = $500

4. Break-even number of cases per month = Total fixed costs / Contribution margin per case = $19460 / $55.60 = 350 cases

2 Contribution margin per case: Selling price per case $ 100.00 Less: Variable costs Direct materials 17.00 Direct labor 7.20 Factory overhead 0.20 Sales commission 20.00 Total variable costs 44.40 Contribution margin per case $ 55.60

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