Hi everyone,

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?

If these are not correct, could you please help me?
Thank you,
fustrated
:)

you need to minues 16.00 (commission) per sales caes.

You have 62.8 but -16 = 46.98 (per teacher):o

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.

Correct

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?

Don't know where you got the $5.04, but I'm going to presume that's direct labor since you didn't give that information, but it seems logical. And you left off the $16 commission. Commission isn't factory overhead. It's a selling cost. However, contribution margin is sales minus all variable costs, regardless of whether they are product or period costs. So the $16 has to come out. (i.e. what moromba said, except this is the reason, not cause "per teacher.")

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?

I don't know because you never gave any overhead information. Except for the $200 of course. But let's pretend for the moment this is all correct. (They are all fixed expenses, but whether you've included everything or not I don't know.)

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?

Where did you get 96? Break-even is fixed costs divided by contribution margin. Each unit made will cost the variable costs. The leftovers are the contribution margin for each unit made. That contributes towards covering the fixed costs. If you take fixed costs and divide by contribution margin, it's telling you how many you need to make in order to cover the fixed costs. You should be using the number figured in step (2) (once it's corrected for the $16).

Correct



Don't know where you got the $5.04, but I'm going to presume that's direct labor since you didn't give that information, but it seems logical. And you left off the $16 commission. Commission isn't factory overhead. It's a selling cost. However, contribution margin is sales minus all variable costs, regardless of whether they are product or period costs. So the $16 has to come out. (i.e. what moromba said, except this is the reason, not cause "per teacher.")



I don't know because you never gave any overhead information. Except for the $200 of course. But let's pretend for the moment this is all correct. (They are all fixed expenses, but whether you've included everything or not I don't know.)



Where did you get 96? Break-even is fixed costs divided by contribution margin. Each unit made will cost the variable costs. The leftovers are the contribution margin for each unit made. That contributes towards covering the fixed costs. If you take fixed costs and divide by contribution margin, it's telling you how many you need to make in order to cover the fixed costs. You should be using the number figured in step (2) (once it's corrected for the $16).

Could you please show your final answer not withstanding those items that were not given? I just want to compare my 'final' answer with what you have. Thanks!

No, I don't just give answers to homework. If you want yours checked, then post them and I'll check them.