Question

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Cane Company manufactures two products called Alpha and Beta that sell for $185 and $150, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 119,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	40			$	24
Direct labor			33				28
Variable manufacturing overhead			20				18
Traceable fixed manufacturing overhead			28				31
Variable selling expenses			25				21
Common fixed expenses			28				23
Total cost per unit		$	174			$	145

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? Traceable fixed manufacturing overhead? Alpha - Beta 2. What is the company’s total amount of common fixed expenses? Total common fixed expenses? 3. Assume that Cane expects to produce and sell 93,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 23,000 additional Alphas for a price of $132 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease? Net operating income by? 4. Assume that Cane expects to produce and sell 103,000 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 $61 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease? Net operating income by?

Answer 1

	1
			Alpha	Beta
	A	Traceable Fixed MOH PU	28.00	31.00
	B	Units to produced	119000	119000
	A*B	Traceable Fixed MOH Total	3332000	3689000	7021000
	2
			Alpha	Beta
	A	Common Cost PU	28.00	23.00
	B	Units to produced	119000	119000
	A*B	Common Cost Total	3332000	2737000	6069000
	3&4		Alpha	Beta
		Current Sales Demand	93000	103000
		Add: External Special Order	23000	2000
		Total	116000	105000
			(Within Capacity)
		Relevant Cost for Special Order:	Alpha	Beta
		Direct Material	40.00	24.00
		Direct Labor	33.00	28.00
		VMOH	20.00	18.00
		Traceable Fixed MOH PU	28.00	31.00
		Variable Sales Exp	25.00	21.00
		Total Relevant Cost	146.00	122.00
		Special Selling Price	132.00	61.00
		Loss in Selling	-14.00	-61.00
		Special Order Units	23000	2000
		Financial Disadvantage	-322000	-122000