Question

Cane Company manufactures two products called Alpha and Beta that sell for $215 and $160, respectively. Each product uses only one type of raw material that costs $7 per pound. The company has the capacity to annually produce 125,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	42			$	21
Direct labor			35				28
Variable manufacturing overhead			23				21
Traceable fixed manufacturing overhead			31				34
Variable selling expenses			28				24
Common fixed expenses			31				26
Total cost per unit		$	190			$	154

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.

Required:

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 96,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 26,000 additional Alphas for a price of $144 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 106,000 Betas during the current year. One of Cane’s sales representatives has found a new customer that is willing to buy 4,000 additional Betas for a price of $74 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 111,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 26,000 additional Alphas for a price of $144 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 12,000 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

1. What is the total amount of traceable fixed manufacturing overhead for the Alpha product line and for the Beta product line?
Answer 1.
Particular		Alfa	Beta
Traceable fixed overhead per unit (a)		$31	$34
Level of Activity ie (No of Units ) (b)		125000	125000
Hence Traceable Fixed Cost (a x b)		$3,875,000	$4,250,000
2. What is the company’s total amount of common fixed expenses?
Answer 2.
Particular	Alfa			Beta
Common fixed expenses per unit (a)	$31			$26
Level of Activity ie (No of Units ) (b)	125000			125000
Hence Traceable Fixed Cost (a x b)	$3,875,000			$3,250,000
Hence Total Fixed Expenses				Amount
Alfa				$3,875,000
Beta				$3,250,000
Total				$7,125,000
3. Assume that Cane expects to produce and sell 96,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 26,000 additional Alphas for a price of $144 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease?
Impact on operating profit with additional Units of 26000 Alfas
Particular					Unit	Total (26000 Units)
Additional Revenue for sales of 26000 units (a)					$144	$        3,744,000.00
Additional Cost
1. Direct Material					$42	$        1,092,000.00
2.Direct Labour					$35	$            910,000.00
3. Variable Manufacturing Over Head					$23	$            598,000.00
4. Variable Selling Overhead					$28	$            728,000.00
Total Variable Overhead (b)					$128	$        3,328,000.00
Additional Operating Profit (a-b)						$            416,000.00
Hence Operaing Profit will increased by $416000
Note Fixed Cost is not charged as it will remain same even if additional units sold or not

4. Assume that Cane expects to produce and sell 106,000 Betas during the current year. One of Cane’s sales representatives has found a new customer that is willing to buy 4,000 additional Betas for a price of $74 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease?
Impact on operating profit with additional Units of 4000 Betas
Particular	Unit	Total (4000 Units)
Additional Revenue for sales of 4000 units (a)	$74	$            296,000.00
Additional Cost
1. Direct Material	$21	$              84,000.00
2.Direct Labour	$28	$            112,000.00
3. Variable Manufacturing Over Head	$21	$              84,000.00
4. Variable Selling Overhead	$24	$              96,000.00
Total Variable Overhead (b)	$94	$376,000
Additional Operating Profit (a-b)		$            (80,000.00)
Hence Operaing Profit will decreased by $80000
5. Assume that Cane expects to produce and sell 111,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 26,000 additional Alphas for a price of $144 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 12,000 units.
Particular	Total
Additional Revenue for sales of 26000 units (a)	$                                        3,744,000.00
Additional Cost (To be incurred for additiona => 26000-12000 = 14000 units)Only because due to acceptance of New offer 12000 regular customer will not by product)
1. Direct Material (42*14000)	$                                            588,000.00
2.Direct Labour (35*14000)	$                                            490,000.00
3. Variable Manufacturing Over Head (23*14000)	$                                            322,000.00
4. Variable Selling Overhead (28*14000)	$                                            392,000.00
Total Variable Overhead (b)	$                                        1,792,000.00
Loss of Sale due to acceptance of offer (12000* $215) (c )	$                                        2,580,000.00
Net Increment Profit or Loss (a-b-c)	$                                          (628,000.00)
Decrease in Operating Profit By $ 628000
5 (b). Based on your calculations above should the special order be accepted?
Ans : No (we should not accept offer)