Question

Cane Company manufactures two products called Alpha and Beta that sell for $240 and $162, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 131,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	35			$	15
Direct labor			48				23
Variable manufacturing overhead			27				25
Traceable fixed manufacturing overhead			35				38
Variable selling expenses			32				28
Common fixed expenses			35				30
Total cost per unit		$	212			$	159

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

       

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

       

3.

Assume that Cane expects to produce and sell 100,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 30,000 additional Alphas for a price of $160 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease?

       

4.

Assume that Cane expects to produce and sell 110,000 Betas during the current year. One of Cane’s sales representatives has found a new customer that is willing to buy 2,000 additional Betas for a price of $83 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease?

      

5.

Assume that Cane expects to produce and sell 115,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 30,000 additional Alphas for a price of $160 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 14,000 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

Answer 1

Solution 1:

Traceable Fixed manufacturing overhead - Alpha product line = 131000*$35 = $4,585,000

Traceable Fixed manufacturing overhead - Beta product line = 131000 * $38 = $4,978,000

Solution 2:

Company's total amount of common fixed expenses = (131000*$35) + (131000*$30) = $8,515,000

Solution 3:

Computation of income from special order - Alpha
Particulars	Amount
Revenue from special order (30000*$160)	$4,800,000.00
Relevant cost:
Direct material	$1,050,000.00
Direct Labor	$1,440,000.00
Variable mnaufacturing overhead	$810,000.00
Variable selling expenses	$960,000.00
Income from special order	$540,000.00

Therefore profit will increase by $540,000 on accepting special order of alpha.

Solution 4:

Computation of income from special order - Beta
Particulars	Amount
Revenue from special order (2000*$83)	$166,000.00
Relevant cost:
Direct material	$30,000.00
Direct Labor	$46,000.00
Variable mnaufacturing overhead	$50,000.00
Variable selling expenses	$56,000.00
Income from special order	-$16,000.00

Therefore profti will decrease by $16,000 on acceptance of special order of beta.

Solution 5:

Differential Analysis - Regular sale alpha (alt 1)or accept special alpha order (Alt2)
Particulars	Regular Sale (115000 Units) (Alt 1)		Accept special alpha order (Regular Sale - 101000 Units, Special Order - 30000 Units)		Differential effect on income (Alt 2)
	Details	Amount	Details	Amount
Revenue	115000*$240	$27,600,000.00	(101000*$240) + (30000*160)	$29,040,000.00	$1,440,000.00
Costs:
Direct Material	115000*$35	$4,025,000.00	131000*$35	$4,585,000.00	$560,000.00
Direct Labor	115000*$48	$5,520,000.00	131000*$48	$6,288,000.00	$768,000.00
Variable manufacturing Overhead	115000*$27	$3,105,000.00	131000*$27	$3,537,000.00	$432,000.00
Variable Selling Expenses	115000*$32	$3,680,000.00	131000*$32	$4,192,000.00	$512,000.00
Traceable Fixed manufacturing overhead	131000*$35	$4,585,000.00	131000*$35	$4,585,000.00	$0.00
Common fixed expenses	131000*$35	$4,585,000.00	131000*$35	$4,585,000.00	$0.00
Income / (Loss)		$2,100,000.00		$1,268,000.00	-$832,000.00

As there is decrease in operating income on acceptance of special roder therefore special order should not accepted.