Question

Cane Company manufactures two products called Alpha and Beta that sell for $165 and $130, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 113,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	40			$	24
Direct labor			29				25
Variable manufacturing overhead			15				14
Traceable fixed manufacturing overhead			25				27
Variable selling expenses			21				17
Common fixed expenses			24				19
Total cost per unit		$	154			$	126

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.

1-1. What is the total amount of traceable fixed manufacturing overhead for each of the two products? (Alpha / Beta)

1-2. What is the company’s total amount of common fixed expenses?

2-1. Assume that Cane expects to produce and sell 89,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 19,000 additional Alphas for a price of $116 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

2-2. Assume that Cane expects to produce and sell 99,000 Betas during the current year. One of Cane’s sales representatives has found a new customer who is willing to buy 2,000 additional Betas for a price of $48 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

2-3.

Assume that Cane expects to produce and sell 104,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 19,000 additional Alphas for a price of $116 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 10,000 units.

What is the financial advantage (disadvantage) of accepting the new customer’s order?

3-1. Assume that Cane normally produces and sells 99,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

3-2. Assume that Cane normally produces and sells 49,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

Answer 1

1-1	Total amount of Traceable Fixed manufacturing Overhead
		Alpha	Beta
	Traceable fixed manufacturing overhead per unit ($)	25	27
	Level of activity ( units )	113000	113000
	Total Traceable fixed manufacturing overhead ( $ )	2825000	3051000
	(Traceable fixed manufacturing overhead per unit * Level of activity )
1-2	Total amount of Common Fixed Expenses
		Alpha	Beta
	Common Fixed Expenses per unit ($)	24	19
	Level of activity ( units )	113000	113000
	Total Common fixed expenses ( $ )	2712000	2147000
	(Common fixed expenses per unit * Level of activity )
2-1	Financial advantage / ( disadvantage ) of accepting new customer's order
		Units	per unit ( $ )	Amount	Amount
	Incremental Revenue	19000	116		2204000
Less :	Incremental Variable Expenses
	Direct Material	19000	40	760000
	Direct Labor	19000	29	551000
	Variable manufacturing overhead	19000	15	285000
	Variable selling expenses	19000	21	399000	1995000
	Financial Advantage				209000
2-2	Financial advantage / ( disadvantage ) of accepting new customer's order
		Units	per unit ( $ )	Amount	Amount
	Incremental Revenue	2000	48		96000
Less :	Incremental Variable Expenses
	Direct Material	2000	24	48000
	Direct Labor	2000	25	50000
	Variable manufacturing overhead	2000	14	28000
	Variable selling expenses	2000	17	34000	160000
	Financial Disadvantage				-64000
2-3	Financial advantage / ( disadvantage ) of accepting new customer's order
		Units	per unit ( $ )	Amount	Amount
	Incremental Revenue	19000	116		2204000
Less :	Incremental Variable Expenses
	Direct Material	19000	40	760000
	Direct Labor	19000	29	551000
	Variable manufacturing overhead	19000	15	285000
	Variable selling expenses	19000	21	399000	1995000
	Incremental Contribution				209000
	Contribution Lost on 10,000 units	10000	60		600000
	Financial Advantage				-391000
*	Contribution per unit of alpha
		Per unit	Per unit
	Sales Price		165
	Less : variable expenses
	Direct Material	40
	Direct Labor	29
	Variable manufacturing overhead	15
	Variable selling expenses	21	105
	Contribution margin		60
3-1	Financial advantage / ( disadvantage ) of discontinuing Beta Product Line
	Calculation of Cotribution Margin
			Beta
	Sales Price		130
	Less : variable expenses
	Direct Material	24
	Direct Labor	25
	Variable manufacturing overhead	14
	Variable selling expenses	17	80
	Contribution margin		50
	Loss on Contribution Margin ( 99,000 units * $ 50 )	-4950000
	Avoidable Fixed manufacturing overhead ( 113,000 units * $ 27 )	3051000
	Financial Advanatage / ( Disadvantage )	-1899000
	Financial ( Disadvantage )	(1899000)
3-2	Financial advantage / ( disadvantage ) of discontinuing Beta Product Line
	Loss on Contribution Margin ( 49,000 units * $ 50 )	-2450000
	Avoidable Fixed manufacturing overhead ( 113,000 units * $ 27 )	3051000
	Financial Advanatage / ( Disadvantage )	601000
	Financial Advantage	601000