Question

Required information

The Foundational 15 [LO12-2, LO12-3, LO12-4, LO12-5, LO12-6]

[The following information applies to the questions displayed below.]

Cane Company manufactures two products called Alpha and Beta that sell for $120 and $80, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 100,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	30			$	12
Direct labor			20				15
Variable manufacturing overhead			7				5
Traceable fixed manufacturing overhead			16				18
Variable selling expenses			12				8
Common fixed expenses			15				10
Total cost per unit		$	100			$	68

The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are unavoidable and have been allocated to products based on sales dollars.

1. What is the total amount of traceable fixed manufacturing overhead for each of the two products?

.2. What is the company’s total amount of common fixed expenses?

3. Assume that Cane expects to produce and sell 80,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 10,000 additional Alphas for a price of $80 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

4. Assume that Cane expects to produce and sell 90,000 Betas during the current year. One of Cane’s sales representatives has found a new customer who is willing to buy 5,000 additional Betas for a price of $39 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

5. Assume that Cane expects to produce and sell 95,000 Alphas during the current year. One of Cane’s sales representatives has found a new customer who is willing to buy 10,000 additional Alphas for a price of $80 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 5,000 units.

a. What is the financial advantage (disadvantage) of accepting the new customer’s order?

b. Based on your calculations above should the special order be accepted?

6. Assume that Cane normally produces and sells 90,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

7. Assume that Cane normally produces and sells 40,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

Answer 1

1)

	Traceable fixed manufacturing overhead
Alpha	16*100000=1,600,000
Beta	18*100000= 1,800,000

2)

	Total amount of common fixed expense
Alpha	15*100000= 1,500,000
Beta	10*100000=1,00,000
Total Amount of common fixed cost	2,500,000

3 )

Variable cost varies with number of units produced /sold so it is always a relevant cost while deciding as to acceptance of offer.Fixed cost remain constant irrespective of number of units produced /sold thus it is not a relevant cost

Selling price	80
less:Direct material	(30)
Direct labor	(20)
Variable overhead	(7)
Variable selling	(12)
Financial advantage/ (Disadvantage) per unit	11
number of units	10000
Total financial advantage from acceptance of offer	11*10000=110000

4)

Selling price	39
less:Direct material	(12)
Direct labor	(15)
Variable overhead	(5)
Variable selling	(8)
Financial advantage/ (Disadvantage) per unit	(1)
number of units	5000
Total financial Disadvantage from acceptance of offer	-1*5000=-5000