ABC and CVP Analysis: Multiple Products Good Scent, Inc., produces two colognes:
ID: 2458868 • Letter: A
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:
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.
* 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.
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.
Cost Driver Rose Violet Expected sales (in cases) 50,000 10,000 Selling price per case $98 $78 Direct labor hours 37,300 6,300 Machine hours 9,850 3,150 Receiving orders 53 27 Packing orders 104 50 Material cost per case $52 $43 Direct labor cost per case $9 $6Explanation / Answer
Answer 1. Price Variable Costs Contribution Margin Sales Mix Total Contribution Margin Rose $98 $69.95 $28.05 5 140.25 Violet $78 $56.56 $21.44 1 21.44 Total 161.69 Rose Variable Costs = $52 + $9 + ($12 X (37300/50000) = $69.95 Violet Variable Costs = $43 + $6 + ($12 X 6300 / 10000) = $56.56 * $523200 / 43600 DLH = $12 per direct labour Hr. Break Even Packages = $522000 / $161.69 = 3228 Cases of Rose = 5 X 3228 = 16140 Cases of Violet = 1 X 3228 = 3228 Answer 2. Unit Based Variable Costs Rose Violet Prime Costs $61 $49 Benefits (a) $3.80 $3.21 Machine Costs (b) $4.56 7.29 Total $69 $60 X Units in Mix X 5 X 1 Package 346.8 59.5 = $406.3 (a) $222360/ 43600 = $5.10 per hr Per Unit of Rose = $5.10 x (37300/50000) = $3.80 Per Unit of Violet = $5.10 x (6300/10000) = $3.21 (b) $300840 /13000 = $23.14 per hr. Per Unit of Rose = $23.14 x (9850/50000) = $4.56 Per Unit of Violet = $23.14 x (3150/10000) = $7.29 Non-unit-based variable costs (assumes strictly variable behavior for each cost driver with no fixed component): Receiving: $224,000/80 = $2800/receiving order Packing: $112,000/154 = $727.27/packing order CVP analysis: Let X1 = Number of packages X2 = Number of receiving orders X3 = Number of packing orders Packages = ($186,000 + $2800X2 + $727.27X3)/$161.70* *Sales revenue per package [($98 × 5) + ($78 × 1)] – Variable cost per package ($406.30) = $161.70 Assume X2 = 80 and X3 = 154. Packages = $522,000/$161.7 = 3228 Break-even cases of Rose = 5 × 3228 = 16140 Break-even cases of Violet = 3228