Sorrentino Company 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, rolled flat, and cut into fettucine or lasagna noodles, then dried and packaged. $0.50 of direct labor. 50 jars of sauce can be produced per machine hour. The production manager believes that with careful scheduling, he can keep the total number of setups (for both pasta and sauce) to the same number as used last year. The marketing director expects to increase selling expense by $25,000 per year to promote the new product and believes Sorrentino Company can sell two boxes of pasta for every one jar of sauce. Required: 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 end of the year. Over the course of the year, 718,200 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 Direct materials Direct labor $0.90 0.35 0.25 1. Separate overhead into fixed and variable components using regression analysis. Run three regressions, using the following independence variables: (a) number of setups, (b) number of machine hours, and (c) a multiple regression using both number of setups and machines. Which regression equation is best? Why? 2. Using the results from (1) above calculate the number of boxes of pasta which must be sold to break even before the expansion into the production of sauces. 3. Now consider the production of sauces. Using the results of multiple regression equation 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 and jars of sauce. 5. Refer to the original data Suppose that only 30 jars of sauce can be produced per machine hour and that Sorrentino Company will sell 3 boxes of pasta for every one jar of sauce. Calculate the new break-even number of boxes of pasta and jars of sauce. 6. Explain how uncertainty in the sales mix and in cost estimates affect the break-even points for Sorrentino Company. Overhead 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 activity. Paul has accumulated the following information on overhead costs, number of setups, and machine hours for the past 12 months. Month Number of Setups Machine Hours January $5,700 18 595 February 4,500 560 March 4.790 12 575 April 5,500 15 615 May 6,240 660 100 June 5.100 July 5.532 16 630 August 5,409 602 602 5,300 11 635 635 5,000 12 550 November 5,450 14 582 December 14 615 September October 5,470 Selling and administrative expenses, all fixed, amounted to $175,000 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 sauces are mixed cooked and packaged into plastic containers. One jar of sauce is priced at $2 and required $0.75 of direct materials and Sorrentino Company 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, rolled flat, and cut into fettucine or lasagna noodles, then dried and packaged. $0.50 of direct labor. 50 jars of sauce can be produced per machine hour. The production manager believes that with careful scheduling, he can keep the total number of setups (for both pasta and sauce) to the same number as used last year. The marketing director expects to increase selling expense by $25,000 per year to promote the new product and believes Sorrentino Company can sell two boxes of pasta for every one jar of sauce. Required: 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 end of the year. Over the course of the year, 718,200 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 Direct materials Direct labor $0.90 0.35 0.25 1. Separate overhead into fixed and variable components using regression analysis. Run three regressions, using the following independence variables: (a) number of setups, (b) number of machine hours, and (c) a multiple regression using both number of setups and machines. Which regression equation is best? Why? 2. Using the results from (1) above calculate the number of boxes of pasta which must be sold to break even before the expansion into the production of sauces. 3. Now consider the production of sauces. Using the results of multiple regression equation 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 and jars of sauce. 5. Refer to the original data Suppose that only 30 jars of sauce can be produced per machine hour and that Sorrentino Company will sell 3 boxes of pasta for every one jar of sauce. Calculate the new break-even number of boxes of pasta and jars of sauce. 6. Explain how uncertainty in the sales mix and in cost estimates affect the break-even points for Sorrentino Company. Overhead 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 activity. Paul has accumulated the following information on overhead costs, number of setups, and machine hours for the past 12 months. Month Number of Setups Machine Hours January $5,700 18 595 February 4,500 560 March 4.790 12 575 April 5,500 15 615 May 6,240 660 100 June 5.100 July 5.532 16 630 August 5,409 602 602 5,300 11 635 635 5,000 12 550 November 5,450 14 582 December 14 615 September October 5,470 Selling and administrative expenses, all fixed, amounted to $175,000 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 sauces are mixed cooked and packaged into plastic containers. One jar of sauce is priced at $2 and required $0.75 of direct materials and