Comprehensive Problem 5 Part A: Note: You must complete part A before completing

Question

Comprehensive Problem 5 Part A: Note: You must complete part A before completing parts B and C. Genuine Spice Inc. began operations on January 1, 2014. The company produces a hand and body lotion in an eight-ounce bottle 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 Cream base Natural oils Bottle (8-oz.) Cost Behavior Variable Variable Variable Units per Case 100 ozs. 30 ozs 12 bottles Cost per Unit $0.02 0.30 0.50 Direct Materials Cost per Case $ 2.00 9.00 6.00 17.00 DIRECT LABOR Labor Rate per Hour $18.00 14.40 Direct Labor Cost per Case $6.00 1.20 7.20 Time per Case Department Mixing Filling Cost Behavior Variable Variable 20 min 25 min. FACTORY OVERHEAD Utilities Facility lease Equipment depreciation Supplies Cost Behavior Mixed Fixed Fixed Fixed Total Cost $600 14,000 4,300 660 19,560

Explanation / Answer

Solution:

Units sold Utility Total cost Highest activity level 1,200 740 Lowest activity level 500 600 Difference 700 140 Variable Cost = Difference in utility costs / Difference in units sold Variable cost = $ 140 / 700 0.20 Fixed cost at 20,000 units = Total cost - Variable cost Total cost                                                                             740 Less: Variable cost - $ 0.2 * 1200                                                                             240 Fixed cost =                                                                             500 At high point At low point 1 Variable cost per unit 0.2 0.2 Total fixed cost 500 500 Total cost 600 740 2 Contribution margin Sales price per case 100 Less: Variable cost per unit Direct material 17 Direct Labor 7.2 Utlity expense 0.2 Contribution margin 75.6 3 Total Fixed costs Utilities expense                                500 Facility Lease 14,000 Equipment depreciation 4,300 Supplies 660 Total Fixed costs                          19,460 4 Break even point = Fixed cost / Contribution per case Total Fixed costs 19460 Contribution margin 75.6 Break even point = $ 19,460 / $ 75.60 257

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