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Blackheath

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BLACKHEATH MANUFACTURING COMPANY

Blackheath Manufacturing produced a single product called the Great Heath. During the past three weeks Lee High, the new cost accountant, had observed that production efficiency and input prices were constant but that output varied considerably. These three weeks were thought of as typical by the salesman who said that they could be taken as average. Production costs were accumulated and accounted for under seven different groups listed below:

| Units of outputs | Direct Materials | Direct Labour | Indirect Labour | Indirect Materials | Electricity | Factory Insurance | Other Overhead | Week 1 | 400 | £300 | £550 | £180 | £300 | £115 | £125 | £310 | Week 2 | 500 | 375 | 625 | 200 | 300 | 125 | 125 | 360 | Week 3 | 600 | 450 | 750 | 220 | 300 | 135 | 125 | 410 |

Lee High thought that this would be an ideal time to do some cost analysis on the Great Heath. Based on the data for three weeks' production cost he felt it would be possible to identify fixed costs, variable costs, and semi-variable costs. Furthermore, Lee wanted to develop some equations which might be useful for managerial decision making. From such equations it seemed that break-even volume could be generated. Since production was usually based on orders actually received and since products were shipped immediately upon completion, inventories of work-in-process and finished goods were practically nonexistent. When talking to the salesman Lee discovered that on typical orders the selling price of Great Heath was £7.00. During lunch one day, Lee was told by the president that office expenses including certain selling items were fixed at £781 per week.

Lee High decided to begin his analysis with profit and loss statements for the three weeks:

| Week 1 | Week 2 | Week 3 | Sales | £2800 | 3500 | £4200 | Cost of Goods Sold | 1830 | 2110 | 2390

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