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 $5.60 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				$	14,692,650
Costs
Manufacturing costs	$	14,443,895
Allocated corporate costs (@5%)		734,633			15,178,528
Product-line margin				$	(485,878	)
Allowance for tax (@20%)					97,175
Product-line profit (loss)				$	(388,703	)

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 years 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	$	113,750,000	$	5,687,500
Previous year	$	76,900,000		4,902,595

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	213,500	$1,151,328
2	220,700	1,173,828
3	218,400	1,182,481
4	234,500	1,198,023
5	250,400	1,200,327
6	243,500	1,221,173
7	223,700	1,196,199
8	250,700	1,239,274
9	242,300	1,237,726
10	256,100	1,249,825
11	253,700	1,254,260
12	262,700	1,284,951

Linear Regression Model for Variable Cost

Filters:

Cost = 2.236 * Units + 6.823E5 +

Obs = 12

RMSE = 7,969.9643

R-sq = .96107694

Adjusted R-sq = .95718464

Variable	Coefficient	t	p > | t |	Significance	Std Err
Units	2.236	15.71	2.235E-8	***	0.1423
Constant	6.823E5	20.53	1.665E-9	***	3.324E4

1. What is the fixed production cost per case based on the current sales volume per month? Round to four decimals.

2. The following questions are based on Lukes current accounting practices. Recalculate the CM per case of Bubbs based on production costs and the treatment of allocated overhead as a variable cost based on revenues. Round to four decimals.

3. Calculate the break-even for Bubbs in cases per month based on production fixed costs and the CM calculated above.

4. Write out a profit formula for Bubbs using Q, CM, and FC as in the prior question. For the desired profit note the after tax profit is .05 P Q / (1-TX), where P is the selling price per case and TX is the tax rate. Now solve for Q to determine the number of case Bubbs must produce and sell per month to earn a 5% return on revenues