Luke Corporation produces a variety of products, each within their own division. Last year, the managers at Luke developed and began marketing a new chewing gum, Bubbs, to sell in vending machines. The product, which sells for $5.25 per case, has not had the market success that managers expected and the company is considering dropping Bubbs. The product-line income statement for the past 12 months follows: Revenue $ 14,682,150 Costs Manufacturing costs $ 14,440,395 Allocated corporate costs (@5%) 734,108 15,174,503 Product-line margin $ (492,353 ) Allowance for tax (@20%) 98,470 Product-line profit (loss) $ (393,883 ) All products at Luke receive an allocation of corporate overhead costs, which is computed as 5 percent of product revenue. The 5 percent rate is computed based on the most recent year’s corporate cost as a percentage of revenue. Data on corporate costs and revenues for the past two years follow: Corporate Revenue Corporate Overhead Costs Most recent year $ 106,750,000 $ 5,337,500 Previous year $ 76,200,000 4,221,000 Roy O. Andre, the product manager for Bubbs, is concerned about whether the product will be dropped by the company and has employed you as a financial consultant to help with some analysis. In addition to the information given above, Mr. Andre provides you with the following data on product costs for Bubbs: Month Cases Production Costs 1 207,000 $1,139,828 2 217,200 1,161,328 3 214,800 1,169,981 4 228,000 1,185,523 5 224,400 1,187,827 6 237,000 1,208,673 7 220,200 1,183,699 8 247,200 1,226,774 9 238,800 1,225,226 10 252,600 1,237,325 11 250,200 1,241,760 12 259,200 1,272,451 a. Bunk Stores has requested a quote for a special order of Bubbs. This order would not be subject to any corporate allocation (and would not affect corporate costs). What is the minimum price Mr. Andre can offer Bunk without reducing profit any further? b. How many cases of Bubbs does Luke have to sell in order to break even on the product?

Luke Corporation produces a variety of products, each within their own division. Last year, the managers at Luke developed and began marketing a new chewing gum, Bubbs, to sell in vending machines. The product, which sells for $5.25 per case, has not had the market success that managers expected and the company is considering dropping Bubbs. The product-line income statement for the past 12 months follows: Revenue $ 14,682,150 Costs Manufacturing costs $ 14,440,395 Allocated corporate costs (@5%) 734,108 15,174,503 Product-line margin $ (492,353 ) Allowance for tax (@20%) 98,470 Product-line profit (loss) $ (393,883 ) All products at Luke receive an allocation of corporate overhead costs, which is computed as 5 percent of product revenue. The 5 percent rate is computed based on the most recent year’s corporate cost as a percentage of revenue. Data on corporate costs and revenues for the past two years follow: Corporate Revenue Corporate Overhead Costs Most recent year $ 106,750,000 $ 5,337,500 Previous year $ 76,200,000 4,221,000 Roy O. Andre, the product manager for Bubbs, is concerned about whether the product will be dropped by the company and has employed you as a financial consultant to help with some analysis. In addition to the information given above, Mr. Andre provides you with the following data on product costs for Bubbs: Month Cases Production Costs 1 207,000 $1,139,828 2 217,200 1,161,328 3 214,800 1,169,981 4 228,000 1,185,523 5 224,400 1,187,827 6 237,000 1,208,673 7 220,200 1,183,699 8 247,200 1,226,774 9 238,800 1,225,226 10 252,600 1,237,325 11 250,200 1,241,760 12 259,200 1,272,451 a. Bunk Stores has requested a quote for a special order of Bubbs. This order would not be subject to any corporate allocation (and would not affect corporate costs). What is the minimum price Mr. Andre can offer Bunk without reducing profit any further? b. How many cases of Bubbs does Luke have to sell in order to break even on the product?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter16: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 37P: Katayama Company produces a variety of products. One division makes neoprene wetsuits. The divisions...

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Question

The product-line income statement for the past 12 months follows:


Revenue			$	14,682,150
Costs
Manufacturing costs	$	14,440,395
Allocated corporate costs (@5%)		734,108		15,174,503
Product-line margin			$	(492,353	)
Allowance for tax (@20%)				98,470
Product-line profit (loss)			$	(393,883	)

All products at Luke receive an allocation of corporate overhead costs, which is computed as 5 percent of product revenue. The 5 percent rate is computed based on the most recent year’s corporate cost as a percentage of revenue. Data on corporate costs and revenues for the past two years follow:

	Corporate Revenue	Corporate Overhead Costs
Most recent year	$	106,750,000	$	5,337,500
Previous year	$	76,200,000		4,221,000

Roy O. Andre, the product manager for Bubbs, is concerned about whether the product will be dropped by the company and has employed you as a financial consultant to help with some analysis. In addition to the information given above, Mr. Andre provides you with the following data on product costs for Bubbs:

Month	Cases	Production Costs
1	207,000	$1,139,828
2	217,200	1,161,328
3	214,800	1,169,981
4	228,000	1,185,523
5	224,400	1,187,827
6	237,000	1,208,673
7	220,200	1,183,699
8	247,200	1,226,774
9	238,800	1,225,226
10	252,600	1,237,325
11	250,200	1,241,760
12	259,200	1,272,451

a. Bunk Stores has requested a quote for a special order of Bubbs. This order would not be subject to any corporate allocation (and would not affect corporate costs). What is the minimum price Mr. Andre can offer Bunk without reducing profit any further?

b. How many cases of Bubbs does Luke have to sell in order to break even on the product?

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