Holly Manufacturing Case Study

Holly Manufacturing Company produces two cello models. One is a standard acoustic cello that sells for $600 and is constructed from medium-grade materials. The other model is a custom-made amplified cello with pearl inlays and a body constructed from special woods.

The custom cello sells for $900. Both cellos require 10 hours of direct labor to produce, but the custom cello is manufactured by more experienced workers who are paid at a higher rate.

Most of Hollys sales come from the standard cello, but sales of the custom model have been growing. Following is the companys sales, production, and cost information for last year:

Cello		Standard	Custom
Sales and production volume in units		900	100
Unit Selling Price		$600.00	$900.00
Unit costs:
Direct materials		$150.00	$375.00
Direct labor		$180.00	$240.00
Manufacturing overhead*		$135.00	$135.00
Total unit costs		$465.00	$750.00
Unit Gross Profit		$135.00	$150.00
Direct Labor Hours		10.00	10.00
Direct Labor Rate Per Hour		$18.00	$24.00
* Manufacturing overhead costs:
Building depreciation	$ 40,000
Maintenance	15,000
Purchasing	20,000
Inspection	12,000
Indirect materials	15,000
Supervision	30,000
Supplies	3,000
Total manufacturing overhead costs	$135,000

Selling and Administrative expenses:

Commission to sales person 3 % of Sales Revenue

Advertising, CEO salary, etc. $ 30,000 per year.

* These manufacturing overhead costs are company-wide, fixed in nature: they do not vary with the volume of manufacturing activity.

The company allocates overhead costs using the traditional method. Its activity base is direct labor hours. The predetermined overhead rate, based on 10,000 direct labor hours, is $13.50 ($135,000 10,000 direct labor hours).

Johann Brahms, president of Holly, is concerned that the traditional cost-allocation system the company is using may not be generating accurate information and that the selling price of the custom cello may not be covering its true cost.

President Brahms has hired your consulting team to help him understand cost allocation and provide more accurate information and advice. Here are some questions to guide your work.

K. At a selling price of $600 for the standard cello and $1,000 for the custom cello, and assuming the same product mix, what is the breakeven unit volume for each cello (remember it is difficult to sell a fraction of a cello, so round-up. You need to consider the product mix when selling 2 products).

Please show President Brahms a contribution Income Statement reflecting the sales at breakeven.