Question

Cane Company manufactures two products called Alpha and Beta that sell for $150 and $110, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 108,000 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			$	15
Direct labor			26				22
Variable manufacturing overhead			13				11
Traceable fixed manufacturing overhead			22				24
Variable selling expenses			18				14
Common fixed expenses			21				16
Total cost per unit		$	130			$	102

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.

Required:

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 86,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 16,000 additional Alphas for a price of $104 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

5. Assume that Cane expects to produce and sell 101,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 16,000 additional Alphas for a price of $104 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 9,000 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?

Answer 1

Ans
1.
Traceable Manufacturing Overhead
Alpha Beta
Per Unit Cost of Traceable manufacturing o/h 22 26
Levels of activity 1,08,000 1,08,000
Total traceable fixed overhead 2,376,000 2,808,000

2.
Total fixed expenses

Alpha Beta
Common Fixed Expenses 21 16
Levels of activity 1,08,000 1,08,000
Total traceable fixed overhead 2,268,000 1,728,000

3. Financial Advantage of $272,000

The profit impact is computed as follows:
Per Unit Total
$ 16,000 units
Incremental Revenue 104 1,664,000
Incremental Costs:
Direct Labor 26
Direct Material 30
Variable Manufacturing O/h 13
Variable Selling expenses 18
Total Incremental Cost 87 1,392,000

Net Operating Income Increase = 1,664,000 -1,392,000 = $272,000

5.

a) There is a financial disadvantage of $295,000

  Incremental Revenue (16,000 *104) 1,664,000
Incremental Variable Cost (calculated above)   1,392,000
Decrease in Revenue (9000*150) (1,350,000)
Decrease in Expenses (87*9000) 783,000

(2,95,000)

b) No, the special order should not be accepted