Problem: Happy Daze Game Co. produces a wildly popular board game called Stump Me! The company is known for both its progressive and interesting board games and its willingness to embrace nontraditional business techniques. Recently, the company's controller, Renee McKim, suggested to the president that she accumulate data based on an activity-based costing system in addition to the costs that are currently accumulated based on the company's traditional costing system. The president gave her the go-ahead and she has accumulated the following data related to Stump Me!
Sales price $13.50
Variable costs per unit:
Direct material 3.50
Direct labor 2.50
Variable overhead 3.50
Fixed costs:
Setup costs 11,000
Testing costs 6,000
Other fixed costs 25,000
The company's production manager told Renee that the game requires a machine setup each time the plant produces a batch of the games. Currently, the company produces 10 batches each year. Also, he told her that the games are tested and verified before new editions are released to the public. This year he expects that Stump Me! will require 200 testing hours. He also told her that this testing is unique and specific to Stump Me! Other games require different types of testing.
Required
A. Compute break-even, using the conventional break-even formula.
B. Compute break-even, using the ABC break-even formula.
C. Explain the difference between the break-even analyses from questions A and B.