Problem 3-17A Determining the break-even point and preparing a contribution margin income statement
Inman Manufacturing Company makes product that it sells for $60 per unit. The company incurs variable manufacturing costs of $24per unit. Variable selling expenses are $12 per unit, annual fixed manufacturing costs are $189,000 and fixed selling and administrative costs are $141,000 per year.
Determine the break-even point in point in units and dollars using each of the following approaches:
a. Equation method.
b. Contribution margin per unit
c. Contribution margin ratio
d. Confirm your results by preparing a contribution margin income statement for the break-even sales volume.
Problem 4-21A Fairness and cost pool allocations
Daniel Manufacturing Company uses two departments to make its products. Department I is a cutting department that is machine intensive and uses very few employees. Machines cut and form parts and then place the finished parts on a conveyor belt that carries them to Department II where they are assembled into finished goods. The assembly department is labor intensive and requires many workers to assemble parts into finished goods. The company’s manufacturing facility incurs two significant overhead costs: employee fringe benefits and utility costs. The annual costs of fringe benefits are$252,000 and utility costs $180,000. The typical consumption patterns for the two departments are follows.
Department I Department II Total
Machine hours used 16,000 4,000 20,000
Direct labor hours used 5,000 13,000 18,000
The supervisor of each department receives a bonus based on how well the department controls costs. The company’s current policy requires using a single allocation base (machine hours or labor hours) to allocate the total overhead cost of $432,000.
a. Assume that you are the supervisor of Department I. Choose the allocation base that would minimize your department’s share of the total overhead cost. Calculate the amount of overhead that would be allocated to both departments using the base that you selected.
b. Assume that you are the supervisor of Department II. Choose the allocation base that would minimize your department’s share of the total overhead cost. Calculate the amount of overhead that would be allocated to both departments using the base that you selected.
c. Assume that you are the plant manager and have the authority to change the company’s overhead allocation policy. Formulate an overhead allocation policy that overhead allocation for each department using your policy.
d. Explain why it is necessary to disaggregate the overhead cost pool in order to accomplish fairness.