Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 61

CVP Analysis; ABC Costing Using the information in Problem 9-58, complete the following:

Required

1. Compute the breakeven in units for both the current and proposed manufacturing plans, assuming that setup costs vary with the number of batches. Assume that setup costs are the only costs that vary with the number of batches.

---

2. Compare your solution above to that for Problem 9-58 and interpret the difference.

Step 1 of 2

1.?Setup costs are $300 per setup, and there are 3,000 setups, so total setup costs must be $900,000 (3,000 x $300). Thus, the total fixed costs for the current manufacturing plan must be $900,000 for setups and $5,100,000 (=$6,000,000 - $900,000) for the remaining fixed costs.    

The ABC breakeven can be determined as follows. Since batch size is 50, the setup cost for each unit is $300/50 = $6.00.

?Breakeven can be determined as follows:

	Current Plan	Proposed Plan
Contribution Margin	$100-$53.50-$6 = $40.50	$100-$68.75-$6=$25.25
Breakeven	($5,100,000+$1,250,000) /$40.50 = 156,790 units  (or 3,136 batches) To figure the exact breakeven, total setup costs are 3,136 x $300 = $940,800, and: Q = ($5,100,000 + $940,800 + $1,250,000)/($100-43.50-10) =  156,792 units	($2,100,000+$1,250,000) /$25.25 = 132,673 units   (or 2,654 batches) To figure the exact breakeven, total setup costs are 2,654 x $300 = $796,200, and:  Q = ($2,100,000 + 796,200 + $1,250,000)/31.25=  132,679 units

Note as before that the breakeven for the current manufacturing plan is above the current operating level of 150,000 units. Also, since the operating level of 150,000 is based on the assumption of 50 batches of 3,000 each,  to achieve breakeven will require more than 3,000 batches. Thus, breakeven analysis under ABC gives a higher breakeven number than the volume-based approach; it recognizes a larger number of setups and therefore larger setup cost ($940,800 versus $900,000).