Royal Essentials, Inc. Begin operations on January 1, 2008. 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 $80 per case. There is a selling commission of $16 per case. The January direct materials, direct labor, and factory overhead cost are as follows:
Direct Materials
….. Cost Behavior….Units Per Case….Cost per unit…Direct Materials cost per case
Cream base variable….72 ozs. …………..$0.015 …………..$1.08
Natural oils …variable….24 ozs. ……………0.250 …………….6.00
Bottle (8oz.) ..variable… 12 bottles ……….0.400 …………….4.80
………………………………………….. ……………………………$11.88
Direct Labor
Dept. ..Cost Behavior..Time per case..Labor Rate Per hour..Direct Labor Cost per case
The Problem:
The management of Royal Essentials, 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.
2008……………..Case Production……………………Utility Total Cost………………..
January……………………300……………. …………………….$230
February…………………..600……………. ……………………..265
March…………………….1,000…………… ……………………..300
April………………………..900…………. ………………………..292
May…………………………750………….. ………………………275
June………………………..825………….. ………………………280
Instructions:
1. Determine the fixed and variable portion of the utility cost using the high low method.
This is what I came up with, is this correct? $200. Fixed cost and a .10 per unit variable cost.
2. Determine the contribution margin cost per case.
11.88 + 5.04 + .10 = $17.02 variable cost per case minus $80. Sales per case =$62.98
Is this correct?
3. Determine the fixed cost per month, including the utility fixed cost.
Utility 200 plus facility lease 9,694 plus equipment depreciation 3,600, plus supplies 600 =14.094
Is this correct?
4. Determine the break even number of cases per month.
This is what I came up with: 14094/ 96 =146.8 cases per month.
Is this correct?