Question

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Cane Company manufactures two products called Alpha and Beta that sell for $155 and $115, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 110,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	24			$	12
Direct labor			23				26
Variable manufacturing overhead			22				12
Traceable fixed manufacturing overhead			23				25
Variable selling expenses			19				15
Common fixed expenses			22				17
Total cost per unit		$	133			$	107

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

1.

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Required:

1. What is the total amount of traceable fixed manufacturing overhead for the Alpha product line and for the Beta product line?

2.

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

3.

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3. Assume that Cane expects to produce and sell 87,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 17,000 additional Alphas for a price of $108 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease?

4.

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4. Assume that Cane expects to produce and sell 97,000 Betas during the current year. One of Cane’s sales representatives has found a new customer that is willing to buy 3,000 additional Betas for a price of $46 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease?

5.

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5. Assume that Cane expects to produce and sell 102,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 17,000 additional Alphas for a price of $108 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 9,000 units.

a. Calculate the incremental net operating income if the order is accepted? (Loss amount should be indicated with a minus sign.)

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

	Yes
	No

6.

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6. Assume that Cane normally produces and sells 97,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

7.

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7. Assume that Cane normally produces and sells 47,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

8.

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8. Assume that Cane normally produces and sells 67,000 Betas and 87,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 11,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?

9.

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9. Assume that Cane expects to produce and sell 87,000 Alphas during the current year. A supplier has offered to manufacture and deliver 87,000 Alphas to Cane for a price of $108 per unit. If Cane buys 87,000 units from the supplier instead of making those units, how much will profits increase or decrease?

10.

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10. Assume that Cane expects to produce and sell 57,000 Alphas during the current year. A supplier has offered to manufacture and deliver 57,000 Alphas to Cane for a price of $108 per unit. If Cane buys 57,000 units from the supplier instead of making those units, how much will profits increase or decrease?

11.

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11. How many pounds of raw material are needed to make one unit of Alpha and one unit of Beta?

12.

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12. What contribution margin per pound of raw material is earned by Alpha and Beta? (Round your answers to 2 decimal places.)

13.

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13. Assume that Cane’s customers would buy a maximum of 87,000 units of Alpha and 67,000 units of Beta. Also assume that the company’s raw material available for production is limited to 168,000 pounds. How many units of each product should Cane produce to maximize its profits?

14.

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14. Assume that Cane’s customers would buy a maximum of 87,000 units of Alpha and 67,000 units of Beta. Also assume that the company’s raw material available for production is limited to 168,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?

15.

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15. Assume that Cane’s customers would buy a maximum of 87,000 units of Alpha and 67,000 units of Beta. Also assume that the company’s raw material available for production is limited to 168,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)

Answer 1

PART 1 TRACEABLE AMOUNT OF FIXED MANUFACTURING OVERHEAD

PARTICULARS   ALPHA BETA

NO. OF UNITS CAN BE PRODUCED 1,10,000 1,10,000

FIXED MANUFACTURING OVERHEAD $23 $25

TOTAL MANUFACTURING OVERHEAD $25,30,000 $ 27,50,000

PART 2 TOTAL COMMON FIXED EXPENSES

PARTICULARS   ALPHA BETA

NO. OF UNITS CAN BE PRODUCED 1,10,000 1,10,000

COMMON FIXED EXPENSES $22 $17

TOTAL MANUFACTURING OVERHEAD $24,20,000 $ 18,70,000

PART 3 PROFIT FROM THE SALE OF 17000 UNITS OF ALPHA

PARTICULARS AMOUNT

SALES PRICE PER UNIT $108

LESS:

DIRECT MATERIAL PER UNIT $24

DIRECT LABOUR PER UNIT $23

VARIABLE MANUFACTURING OVERHEAD $22

TRACEABLE FIXED MAUFACTURING O/HEAD PER UNIT $23

VARIABLE SELLING EXPENSES PER UNIT $19

COMMON FIXED EXPENSES ( SEE NOTE BELOW ) NIL

LOSS PER UNIT $3

NO. OF UNITS ADDITIONALY TO BE SOLD 17000 UNITS

TOTAL LOSS (17000 UNITS X $3 PER UNIT ) $51000

SO THE TOTAL PROFIT OF THE CANE COMPANY WILL DECREASES BY $51000 IF THEY ACCEPT THE OFFER

NOTE : COMMON FIXED EXPENSES IS UNAVOIDABLE COST SO NOT BEEN TAKEN FOR PRODUCING ADDITIONAL UNITS OR SINCE THE CAPACITY OF THE PLANT IS TO PRODUCE 1,10,000 UNITS OF EACH AND CURRENTLY IT IS PRODUCING ONLY 87000.

UNAVOIDABLE COST IS ALSO CALLED SUNK COST. A sunk cost refers to money that has already been spent and which cannot be recovered

PART 4 PROFIT FROM THE SALE OF 3000 UNITS OF BETA

PARTICULARS AMOUNT

SALES PRICE PER UNIT $46

LESS:

DIRECT MATERIAL PER UNIT $12

DIRECT LABOUR PER UNIT $26

VARIABLE MANUFACTURING OVERHEAD $12

TRACEABLE FIXED MAUFACTURING O/HEAD PER UNIT $25

VARIABLE SELLING EXPENSES PER UNIT $15

COMMON FIXED EXPENSES ( SEE NOTE BELOW ) NIL

LOSS PER UNIT $44

NO. OF UNITS ADDITIONALY TO BE SOLD 3000 UNITS

TOTAL LOSS (17000 UNITS X $3 PER UNIT ) $132000

SO THE TOTAL PROFIT OF THE CANE COMPANY WILL DECREASES BY $132000 IF THEY ACCEPT THE OFFER

NOTE : COMMON FIXED EXPENSES IS UNAVOIDABLE COST SO NOT BEEN TAKEN FOR PRODUCING ADDITIONAL UNITS OR SINCE THE CAPACITY OF THE PLANT IS TO PRODUCE 1,10,000 UNITS OF EACH AND CURRENTLY IT IS PRODUCING ONLY 96000 UNITS

UNAVOIDABLE COST IS ALSO CALLED SUNK COST. A sunk cost refers to money that has already been spent and which cannot be recovered