BREEDEN SECURITY Inc.

ACTG 5210

Group Members
Usman Barlas 215998354
Siddhartha Banga 215702699
Mukul 215727969
EXECUTIVE SUMMARY

Breeden Security Inc. is faced with the problem of allocating its Manufacturing Overhead, to determine

appropriate product costs and breakeven quantities for RC1 & RC2. It is determined that the company needs

to manufacture a total of in excess of 16,356 units per month in order to break even. In order to maintain

profitability, the company should either standardize RC2 packaging to reduce costs or charge customers for

non-standard packaging. The company should incentivize customers to place larger orders and place

minimum order size requirements. Additionally, the company should charge an extra fee for express order or

orders required within a shorter time frame than the standard.

Initially direct labour was being used as a measure to differentiate overhead costs. However, this method was

not affected. The alternative of a time based costing approach was tried which was also not truly reflecting

the costs over the product mix. Finally, Breeden Security Inc. decided to use the “two Factory Approach” to

allocate the costs effectively over the product mix. This was a better attempt in allocating costs through

which breakeven quantity and suggestions were recommended.

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 MEMO

Date: June 9, 2018

To: Herman Klein, President

From: Marlene Baer, Controller

Subject/Re: Analysis & Recommendations for overhead cost allocation

INTRODUCTION: GENERAL OVERVIEW

Breeden Security GmbH, a large German manufacturer of radio equipment, set up a subsidiary in the US to

manufacture two types of products: RC1 and RC2. RC1 is a miniature signaling device used primarily for remote

operations of garage doors. A large manufacturer of motorized garage doors, in 2007, agreed to take a minimum

of RC1 units a year. Based on this, it was forecasted that 120,000 would be a reasonable target for 2008. RC2 is a

device used by householders to turn on inside lights when arriving after dark. This was relatively expensive to

manufacture as compared to RC1. The company decided to initially sell these units through mail-order catalogs.

The company projected sales of 60,000 units for 2008. The actual sales of 2008 turned out to be 100,000 units for

RC1 and 80,000 units for RC2. However, RC2 units had issues pertaining to packaging Issues with RC2 unit

orders. The variety of packaging varied with customers and thus created problems for Breeden. Packaging

included printing display boxes, directions, and guarantee and repair information.

Illusion of Profitability

Due to the extra expenses caused by the packaging, shipping, billing, collection etc. of orders, especially RC2

orders, Breeden had been much less profitable than they had predicted they would be. This was because Breeden

was in essence running two separate factories: one for making the two types of devices and the other for servicing

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customers. This made evident that RC2 as a product was less profitable than predicted and some customers were

less profitable than others owing to their additional demands around packaging etc.

Problem Statement

Breeden Security Inc. is faced with the challenge of how to effectively allocate its Manufacturing Overhead. This

faces them with the question of how to allocate post manufacturing cost such as packaging, billing, collection and

shipping costs. An additional question arises of whether to use direct labor as a base for overhead distribution or

to devise a new methodology for cost allocation?

Analysis

Revised Overhead Costs

Revised Overhead costs per unit using direct labor as the activity measure are

Overhead Costs Per Unit

Activity RC1 RC2

Fabrication $0.65 $0.35

Assembly $0.71 $0.29

Packaging & Shipping $0.17 $0.83

Revised Product Costs

The revised product costs of RC1 is $15.25 and RC2 is $20.49. After using ABC for reallocating the overhead

costs we realize that there was an increase in packaging and shipping cost for RC2. Which led to an increase of

almost $1.5 in RC’s cost.

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Revised Monthly Budget

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Order Driven Cost by Actual Sales Volume

The product costs have changed due to added costs from the second factory in the form of Pack & Ship overhead,

Pack & Shipping Labor and General operations costs.

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Breakeven Number

In order to calculate Breakeven number of units, first we must find the Average Contribution margin, using the

sales mix of 55.56% & 44.44% of RC1 & RC2 Respectively. The average contribution margin comes down to

10.21 using this approach. Now we must calculate the Fixed Expenses. We will use monthly Normal Fixed

Manufacturing Costs, Normal Selling Admin costs and Manufacturing Admin Expense. This will total $167,000.

Thus we have Breakeven at 16356.51 units/ month.

Conclusion

After deep analysis it is concluded that Breeden needs production and sales in excess of 16,356 units per month in

order to break-even. There are some management decisions which the company might consider in order to be

more profitable. It is recommended that the company should charge an express order fee to counter costs. It is also

recommended that the company should standardize RC2 Packaging or pass the cost on to consumers for non-

standard packaging. Finally, the company can place minimum order size requirements to reduce order driven

costs.

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Appendix

Calculation for Q4

In order to obtain the order driven cost we need to obtain RC1 & RC2 order driven Ratio. This can be calculated

using the number of orders below :

Product Number of Orders

RC1 20

RC2 400

RC1/RC2 = 20/400 = 1:20

Thus we can see that there is a ratio of 1:20. Utilizing this ratio we will split the Order driven cost in the same

proportion:

Total Order driven Cost = $168,000

RC1 = $168000/21 = $8000

RC2 = $168,000 - $8000 = $160,000

Using Exhibit 5, total cost per unit for RC1 & RC2 would be $17.522 & $19.63,respectively. Leading the per

unit profit to be $2.48 and $3.37 respectively.