Comment on the effect s of the shift in sales mix and uncertainty in the cost estimat ion on the break even points for Sorrentino

Sorrentino Company which has been in business for one year manufactures specialty Italian pastas Show more Sorrentino Company which has been in business for one year manufactures specialty Italian pastas. The pasta products start in the mixing department where durum flour eggs and water are mixed to form dough. The dough is kneaded rol led flat and cut into fettucine or lasagna noodles then dried and packaged. Paul Gilchrist controller for Sorrentino Company is concerned because the company has yet to make a profit. Sales were slow in the first quarter but really picked up by the en d of the year. Over the course of the year 7 17 5 00 boxes were sold. Paul is interested in determining how many boxes must be sold to break even. He has begun to determine relevant fixed and variable costs and has accumulated the following per unit data: Price $0.9 5 Direct materials 0.35 Direct labor 0.25 He has had more difficulty separating overhead into fixed and variable components. In examining overhead related activities Paul has noticed that machine hour appear to be closely correlated with units in that 100 boxes of pasta can be produced per machine hour. Setups are important batch level activ ity . Paul also thinks that indirect labor hour may be associated with the overhead expense but there is no evidence showing the relation. Currently indirect labor hour is scheduled to be 2000 hours per year. Paul has accumulated the following information on overhead costs number of setups machine hours and indirect labor hours for the past 12 months. Month Overhead Number of Setups Machine Hours Indirect Labor Hours January $5700 18 595 155 February 4500 6 560 135 March 4890 12 575 125 Ap ril 5500 15 615 200 May 6320 20 680 240 June 5100 10 552 183 July 5532 16 630 205 August 5409 12 600 115 September 5300 11 635 162 October 4950 12 525 145 November 5350 14 593 185 December 5600 14 615 150 Selling and administrative expen ses all fixed amounted to $ 200 000 last year. In the second year of operations Sorrentino Company has decided to expand into the production of sauces to top its pastas. Sauces are also started in the mixing department using the same equipment. The sau ces are mixed cooked and packaged into plastic containers. One jar of sauce is priced at $2 and required $0. 6 5 of direct materials and A CC320 Group Project 1 CVP and Regression Analysis $0. 4 5 of direct labor. 60 jars of sauce can be produced per machine hour. The production manager believes that with car eful scheduling he can keep the total number of setups and total number of indirect labor hours (for both pasta and sauce) to the same number as used last year. The marketing director expects to increase selling expense by $ 30 000 per year to promote the new product and believes Sorrentino Co mpany can sell three boxes of pasta for every one jar of sauce. Required: 1. Separate overhead into fixed and variable components using regression analysis. Run seven regressions by using different combinations of thre e independent variables: number of setups machine hours and indirect labor hours. These seven regressions are: a) three simple regressions; b) three multiple regression s using two independent variables; c) multiple regression using all independent variab les. Which regression equation is the best? Why? Now the best regression equation is chosen use it to answer the following questions: 2. C alculate the number of boxes of pasta which must be sold to break even before the expansion into the production of s auces. 3. Now con sider the production of sauces calculate the break even number of boxes of pasta and jars of sauce. 4. Suppose that the production manager is wrong and that the number of setups doubles. Calculate the new break even number of boxes of pasta an d jars of sauce. 5. Refer to the original data. Suppose that only 4 0 jars of sauce can be produced per machine hour and that Sorrentino Company will sell two boxes of past a for every one jar of sauce. Calculate the new break even number of boxes of pasta and jars of sauce. 6. Comment on the effect s of the shift in sales mix and uncertainty in the cost estimat ion on the break even points for Sorrentino Company. I have already done part 1. Show less


 

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