ABC and CVP Analysis: Multiple Products Good Scent, Inc., produces two colognes:
ID: 2517646 • 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.
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 $7Explanation / Answer
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
Break even point = fixed costs / contribution margin
Fixed costs for each product
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.
Fixed costs on the basis of ABC
Break even cases of Rose = 387179.49 / 32.54
= 11898 cases
Break even cases of Violet = 162820.51 / 21.1
= 7718 cases
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