Case Study

1. What is the break even in units and Margin of safety in units for each year

Break even units

Break even units = Total Fixed Costs / Contribution margin per unit

2014 = 1347686 /38

=35465 units

2015 = 1619469 /36

=44985 units

2016 =1379441 /32

=43108 Units

Note: Contribution margin per unit = (Sales price per unit – Variable Cots per unit)

Margin of Safety

Margin of safety = (Actual Sales – Break even sales) / Selling price per unit

2014 = (100274- 35465)/ 56

=1157.3 Units

2015 = (107108-44985)/54

=1150.3 units

2016 = (117901-43108)/52

=1438.3 Units

The company has calculated that 40% of the variable cost of goods sold are attributable to direct material and that 60% of the variable cost of goods sold are associated with direct labor

Direct material = 40% of Cost of goods sold

Direct labor = 60% of Cost of goods sold

4). what is the direct material cost per item for 2016?

Direct material cost per item = Total direct material cost for the period / Total equivalent unit of direct materials

Direct cost per item 2016 = (40%*2145796)/117901

Direct cost per item 2016 = 7.28

It is projected that the number of units sold for 2017 will increase by 5% from 2016. No change in inventory is scheduled for 2017:

5).What is the production budget for 2017

Production budget	2016	2017
Budgeted Sales	117901	123796
Add: Desired ending inventory	613084	643738
Total Needs	730985	767534
Less; Beginning Inventory	289191	613084
Units to be manufactured	441794	154450

Note no 1 : Ending inventory = Cost of goods available – Cost of goods sold

It is expected that the cost of direct materials will increase by 3% from 2016 to 2017

6). what is the direct material budget for 2017

Direct material budget	2017
Units to be produced ( from production budget )	154450
Direct material per unit	6.93
Total direct material needed for production	1070339
Add: desired ending direct material	884069
less: beginning direct material	858319
Direct material Purchased	1096089

7). what was the direct labor hours per unit for

Direct labor hours per unit = Standard direct labor rate * Standard direct labor hours

a. 10.69 *1.33 = 15.3

b. 10.92 *1.43 =16.8

Note:

Direct labor rate = Total Direct labor / units sold

Direct labor = 60% of cost of goods sold

It is budgeted that the direct labor hours per unit from 2016 will be same for 2017. It is also budgeted that the direct labor rate for 2017 will increase by 2% from 2016

8). what is direct labor budget for 2017?

Direct labor Budget	2017
Budgeted unit to be produce	154450
Direct labor hours per unit	1.54
Direct labor hours needed for production	237853
Direct labor cost per hour	11.14
Budgeted direct labor cost	2649682

When drafting the budget for 2016 the standard hourly rate was set at $12.56 for direct labor

9). what is the direct labor rate variance for 2016?

Direct labor rate variance = (Actual hours * Standard Rate ) –(Actual hours – Actual rate )

Direct labor rate variance = (16.8*12.56)-(16.8 -1.54)

Direct labor rate variance = 195.74

A new piece of manufacturing equipment is being considered for purchase. This machine is projected to reduce total cost goods by 18% (based on 2016 actual results) and have a useful life of 5 years.

10) If the machine costs $2,500,000 should it be purchased? Explain:

Cost = $2500000

Residual value = ($2145796* 18%) =386243

Useful life = 5 Years

Depreciation in straight line method = (Cost – residual value) / Useful life

= (2500000-386243)/5

Depreciation expenses = 422751