Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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. 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 $0.90

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 activity. Paul has accumulated the following information on overhead costs, number of setups, and machine hours for the past 12 months.

Month Overhead Number of Setups Machine Hours
January $ 5,800.00 18 590
February $ 4,500.00 6 560
March $ 4,790.00 12 575
April $ 5,500.00 15 615
May $ 6,250.00 20 660
June $ 5,100.00 10 552
July $ 5,545.00 16 630
August $ 5,390.00 12 608
September $ 5,300.00 11 635
October $ 4,920.00 12 550
November $ 5,450.00 14 582
December $ 5,420.00 14 610
$ 63,965.00 160 7167

Selling and administrative expenses, all fixed, amounted to $187,000 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 $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 $50,000 per year to promote the new product and believes Sorrentino Company can sell two boxes of pasta for every one jar 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, respectively.

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, respectively.

6. Based on the results in Requirements (4) and (5), explain how changes in setup costs and sales mix affect the break-even points for Sorrentino Company.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Accounting questions