[infinity]

Bruell Electronics Co. is developing a new product, surge protectors for high-voltage electrical flows. The following cost information relates to the product.

Unit Costs

Direct materials $3.25

Direct labor 4.00

Distribution .75

The company will also be absorbing $120,000 of additional fixed-costs associated with this new product. A corporate fixed charge of $20,000 currently absorbed by other products will be allocated to this new product.

If the selling price is $14 per unit, the breakeven point in units (rounded to the nearest hundred) for surge protectors is:

a. 10,000 units. b. 15,000 units. c. 20,000 units. d. 23,300 units.

BEC 74

Never give up, never surrender.

[infinity]

Choice “c” is correct. $20,000 units.

Price

Direct materials Direct labor Distribution

$14.00 (3.25) (4.00)

( .75)

Contribution margin Additional “fixed” costs Contribution margin Units to breakeven

$6.00 $120,000 ÷ 6 20,000

How come the additional $20,000 previously absorbed by other products is irrelevant?

BEC 74

Never give up, never surrender.

[infinity]

Choice “c” is correct. $20,000 units.

Price

Direct materials Direct labor Distribution

$14.00 (3.25) (4.00)

( .75)

Contribution margin Additional “fixed” costs Contribution margin Units to breakeven

$6.00 $120,000 ÷ 6 20,000

How come the additional $20,000 previously absorbed by other products is irrelevant?

BEC 74

Never give up, never surrender.

[M.O.D.]

Because the question is about the breakeven for the “surge protectors” themselves, not for the division which makes the surge protectors.

Note the language used “fixed costs associated with this new product” vs “corporate charge allocated to this new product”

The first is a direct (traceable) cost, the second allocated (arbitrary).

It is a tricky question.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[M.O.D.]

Because the question is about the breakeven for the “surge protectors” themselves, not for the division which makes the surge protectors.

Note the language used “fixed costs associated with this new product” vs “corporate charge allocated to this new product”

The first is a direct (traceable) cost, the second allocated (arbitrary).

It is a tricky question.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[infinity]

Oh, that word choice is super sneaky. Thank you for the explanation MOD!

Actually the question asked to round to the nearest hundred, so there really wasn't a red flag to double check that one. Watch out ninjas!

BEC 74

Never give up, never surrender.

[infinity]

Oh, that word choice is super sneaky. Thank you for the explanation MOD!

Actually the question asked to round to the nearest hundred, so there really wasn't a red flag to double check that one. Watch out ninjas!

BEC 74

Never give up, never surrender.

[Author]

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