Genuine Spice Inc. began operations on January 1, 2016. The company produces eig

Question

Genuine Spice Inc. began operations on January 1, 2016. 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: Break -Even Analysis Th e management of Genuine Spice Inc. wishes 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: Determine the fixed and variable portion of the utility cost using the high-low method. Determine the contribution margin per case. Determine the fixed costs per month, including the utility fixed cost from part Determine the break-even number of cases per month. cases

Explanation / Answer

Solution:

1. Calculation of the fixed and variable portion of the utility cost using the high-low method:

At High Point

At Low Point

Change

Case Production

1200

500

700

Utility Total Cost

$740

$600

$140

Per Unit Variable Cost = Change in Utility Cost / Change in Case Production = $140 / 700 = $0.20 per unit

Fixed Cost = Total Cost – Total Variable Cost = $740 – (1200 x $0.20) = $740 - $240 = $500

At High Point

At Low Point

Variable Cost Per Unit

$0.20

$0.20

Total Fixed Cost

$500

$500

Total Cost

$740

$600

2. Calculation of Contribution Margin Per Case

Sale Price Per Case

$100.00

Less: Variable Cost Per Case

Direct Material Per Case

$17.00

Direct Labor Per Case

$7.20

Utility Cost per Case

$0.20

Selling Commission Per Case

$20.00

Total Variable Cost Per Case

$44.40

Contribution Margin

(Sale Price - Variable Cost)

$55.60

Contribution Margin per case = $55.60

3. Calculation of fixed cost per month, including the utility cost from part (1)

Total Fixed Costs:

Facility Lease

$14,000

Equipment Depreciation

$4,300

Supplies

$660

Utility

$500

Total Fixed Costs Per Month

$19,460

4. Calculation of the break even number of cases per month

Break Even Number of Cases per month = Total Fixed Cost per month / Contribution Margin Per Case

= $19,460 / $55.60 = 350 Cases

Break Even Number of Cases per month = 350 Cases

At High Point

At Low Point

Change

Case Production

1200

500

700

Utility Total Cost

$740

$600

$140

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