Question

[The following information applies to the questions displayed below.]

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 average cost per unit 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 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 93,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 23,000 additional Alphas for a price of $132 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

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 who is willing to buy 2,000 additional Betas for a price of $61 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

6. Assume that Cane normally produces and sells 103,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

Answer 1

1) Traceable fixed manufacturing overhead for each of the two products. Alpha product line = 119000 units * 28 = $3,332,000 Beta product line = 119000*31 = $3,689,000 2) Total common fixed cost = 119000*51 = $6,069,000

Amount ($) 40 33 201 25 A 1 3) 2 Particulars 3 Variable cost 4 Direct materials 5 Direct labor 6 Variable manufacturing overhead 7 Variable selling expenses 8 Total variable cost 9 10 Particular 11 Incremental revenue (23000*132) 12 Incremental cost (23000*118) 13 Incremental operating income 14 Profit will increase by $322000 15 118) Amount ($) 3036000 2714000 322000 16 4) Amounts($) 122000 182000 60000) 17 Particulars 18 Incremental revenue (2000*61) 19 Incremental cost (2000*91) 20 Decremented operating income 21 22 6) 23 Particulars Contribution margin lost if beta product line is 24 dropped (103000)*(150-24-28-18-21) 25 Less: Avoidable cost: Tracable fixed manufacturing overhead 26 (119000*31) 27 Financial (Disadvantage) - if beta is dropped Beta 6077000 3689000) -2388000