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# Breeden Security Inc. Case Solution

Solution Id Length Case Author Case Publisher
1454 1031 Words (4 Pages) Brandt Allen Darden School of Business
This solution includes: A Word File

Assuming that the fixed expenses of \$ 91,000 in manufacturing over head are distributed in the same ratio as supplies, \$ 56,875 is allocated to the production of RC 1. The difference amounting to \$ 34,125 is attributed to the manufacturing over heads of RC 2. Dividing 10,000 units by the allocated fixed costs, we get a per unit cost of \$ 5.6875 for RC 1 which brings the total of manufacturing over head cost per unit of RC 1 to \$ 7 per unit. For RC 2 when the initial 5000 units are divided by the fixed manufacturing over heads, we get per unit cost to \$ 6.825. The total per unit cost of manufacturing over heads is \$ 8.4 per unit of RC 2. This suggests that even after reallocating the total manufacturing costs per unit, we still get the same manufacturing cost per unit for both products that is \$ 16 per unit for RC 1 and \$ 19 per unit for RC 2. Also, since the product mix does not change and still remains 2 RC 1’s for each RC 2, the proportion of expenses allocated to each product would not change. The only figure that would change be the total costs and revenues which will subsequently change the monthly profits.

## Following questions are answered in this case study solution

1. What level of sales would be required to provide the parent company with its target profit of \$210,000 for the year?

2. What’s our break-even volume assuming our mix stays the same—two RC 1s for each RC 2?

3. What’s our manufacturing cost per unit if we produce only 8,000 RC1 units and 4,000 RC2 units per month?

4. What’s our profit if each month we only sell 8,000 RC1s and 4,000 RC2s, but we produce 10,000 RC1s and 5,000 RC2s, assuming the unsold units go into finished goods inventory?

## Case Analysis for Breeden Security Inc.

#### 1. What level of sales would be required to provide the parent company with its target profit of \$210,000 for the year?

The selling price for RC 1 is \$ 20 per unit, and RC 2’s selling price is \$ 23 per unit. In this case, we assume that the manufacturing cost per unit is the same, that is, \$ 16 per unit for RC 1 and \$ 19 per unit for RC 2. This means that per unit selling price net of manufacturing costs is \$ 4 per unit for RC 1, as well as, RC 2. The monthly fixed selling and administrative expenses of \$ 40,000 translate into \$ 480,000 per annum. We also assume that the product mix would remain the same that is 2 RC 1’s for each RC 2. After calculation, we estimate that in order to get a yearly profit of \$ 210,000, Breeden security must sell 115,000 units of RC 1 and 57,500 units of RC 2 per year or 9,583 units of RC 1 and 4,792 units of RC 2 per month.

##### Calculation:

(20 - 16) RC1 + (23 - 19) RC2 = (40,000 x 12) + 210,000

Assuming, RC2 = RC1/2

4 RC1 + 2RC1 = 690,000

RC1 = 115,000 units

RC2 = 57,500 units.

#### 2. What’s our break-even volume assuming our mix stays the same—two RC 1s for each RC 2?

Break-even point is the point where there are zero profit or sales equal’s costs. In this case, we assume the same thing as above, that is, the manufacturing costs per unit are \$ 16 for RC 1 and \$ 19 for RC 2. Also assuming that RC 2’s are half that of RC 1, that is RC2= ½ RC1. The selling and admin expenses amount to \$ 480,000 for the year. This gives us the break-even sales of 80,000 units of RC 1 and 40,000 units of RC 2 per year or 6667 units of RC1 and 3333 units of RC2 per month.

##### Calculation:

20 RC1 + 23RC2 = (40,000 x 12) + 16RC1 +19RC2

Substituting RC2 with RC1/2,

31.5RC1 = 480,000 + 25.5RC1

RC1 = 80,000 units per annum

RC2 = 40,000 units per annum.

#### 3. What’s our manufacturing cost per unit if we produce only 8,000 RC1 units and 4,000 RC2 units per month?

For 10,000 units of RC 1, the parts cost \$ 5.5 per unit, and direct labor costs \$ 3.5 per unit. For the 5,000 units of RC 2, the parts cost \$ 6.4 per unit, and direct labor costs \$ 4.2 per unit. According to the budget, only parts, direct labor and supplies are variable costs and vary per unit. Supplies are a portion of manufacturing over head and can be divided among RC 1 and RC 2 based on their unit ratios. For 10,000 units assuming that 62.5% of the total supplies are attributed for RC 1, \$ 13,125 comes as the amount of supplies for RC 1. The rest of \$7,875 can be attributed to RC 2. This brings per unit cost of supplies to \$ 1.3125 per unit for RC 1 and \$ 1.575 per unit for RC 2. The rest of the over head expenses amounting to \$ 91,000 are fixed.

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