Question

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 average cost per unit 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 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 87,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 17,000 additional Alphas for a price of $108 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

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 who is willing to buy 3,000 additional Betas for a price of $46 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

Answer 1

Solution 1:

Traceable manufacturing overhead for Alpha = 110000*$23 = $2,530,000

Traceable manufacturing overhead for Beta = 110000*$25 = $2,750,000

Solution 2:

Total Common fixed expenses = (110000*$22) + (110000*$17) = $4,290,000

Solution 3:

Computation of financial advantage (disadvantage) from special order of Alpha
Particulars	Amount
Revenue ( 17000*$108)	$1,836,000.00
Relevant Cost:
Direct Material (17000*$24)	$408,000.00
Direct Labor (17000*$23)	$391,000.00
Variable manufacturing overhead (17000*$22)	$374,000.00
Variable selling expenses (17000*$19)	$323,000.00
Net Financial advantage (disadvantage) from special order	$340,000.00

Solution 4:

Computation of financial advantage (disadvantage) from special order of Beta
Particulars	Amount
Revenue ( 3000*$46)	$138,000.00
Relevant Cost:
Direct Material (3000*$12)	$36,000.00
Direct Labor (3000*$26)	$78,000.00
Variable manufacturing overhead (3000*$12)	$36,000.00
Variable selling expenses (3000*$15)	$45,000.00
Net Financial advantage (disadvantage) from special order	-$57,000.00