# Split off point, break even analysis

Step down method, Break-even point, Cost Variance, and Split-off point

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4

Blower Company is divided into four departments.

Departments A and B are service departments and Departments 1 and 2 are operating (production) departments

The services of the two service departments are used by the other departments as follows:

Dept. A Dept. B Dept. 1 Dept. 2

Services of:

Department A 50% 20% 30%

Department B 40% 60%

Direct costs incurred

by each department $60,000 $50,000 $70,000 $80,000

Allocate the service departments to the production departments using the step down method.

8

Joseph Co. has three products A, B, and C, and its fixed costs are $69,000.

The sales mix for its products are 3 units of A, 4 units of B, and 1 unit of C. Information about the three products follows:

A B C

Projected sales in dollars $192,000 $192,000 $64,000

Selling price per unit $40 $30 $40

Contribution margin ratio 30% 35% 35%

(a) Calculate the company's break-even point in composite units and sales dollars.

(b) Calculate the number of units of each individual product to be sold at the break-even point.

14

Prichard Company has developed the following standard cost data based on 60,000 direct labor hours, which is 75% of capacity.

Fixed overhead is $360,000 and variable overhead is $180,000 at this level of activity.

Per Unit

Direct material (3 lbs. @ $2.00/lb.) $ 6.00

Direct labor (0.5 hrs. @ $8.00/hr.) 4.00

Variable overhead (0.5 hrs. @ $3.00/hr.) 1.50

Fixed overhead (0.5 hrs. @ $6.00/hrs) 3.00

Total standard cost $14.50

During the current period, the company operated at 80% of capacity and produced 128,000 units. Actual costs were:

Direct material (380,000 lbs.) $779,000

Direct labor (63,000 hrs.) 507,150

Fixed overhead 365,000

Variable overhead 220,000

Calculate the variable overhead spending and efficiency variance and the fixed overhead spending and volume variances. Indicate whether each is favorable or unfavorable.

15

A company puts four products through a common production process.

This process costs $100,000 each year.

The four products can be sold when they emerge from this process at the "split-off point",

or processed further and then sold. Data about the four products for the coming period are:

Unit Sales Unit Sales

Price per Price per

pound pound Additional

at Split-Off after Further Processing

Volume Point Processing Costs

Singer 20,000 lb. $28.00 $42.00 $400,000

Talker 10,000 lb. 7.00 28.00 144,000

Walker 5,000 lb. 36.00 58.00 120,000

Sayer 5,000 lb. 18.00 22.00 40,000

Determine which products should be sold at the split-off point and which should be processed further.

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#### Solution Summary

Allocation of service departments to the production departments using the step down method.

Calculation of company's break-even point in composite units and sales dollars.

Calculation of number of units of each individual product to be sold at the break-even point.

Calculation of variable overhead spending and efficiency variance and the fixed overhead spending and volume variances. Indication whether each is favorable or unfavorable.

Determination of which products should be sold at the split-off point and which should be processed further.