Case Analysis

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, 726,800 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 hours appear to be closely correlated with units in that each box of pasta can be produced in 0.10 machine hour.  Each box requires 0.0022 setups.  Paul has accumulated the following information on overhead costs, number of setups, and machine hours for the past 12 months:

Selling and administrative expenses, all fixed, amounted to $180,000 last year.

Required:

1. Identify what type of cost accounting system should be used by Sorrentino Company.

2. Using the data, develop a cost function for overhead costs.  In doing so, determine what type of cost overhead appears to be.

3. Using the results from the previous requirement, calculate the number of boxes of pasta which must be sold to break even.