Question

CHAPTER END REVIEW Best Sleep Company manufactures two mattress toppers called Alpha and Beta that sell for $210 and $172, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 128,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha Beta $ 40 24 Direct materials Direct labor 38 34 Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses 25 23 33 36 30 26 33 28 $199 $171 Total cost per unit The company considers its traceable fixed manufacturing overhead to be avoidable, where as its common fixed expenses are unavoidable and have been allocated to products based on sales dollars.

Answer 1

Total Variable Cost of Manifacturing Alpha Beta Direct Material Direct Labour Variable Manifacturing Overhead Variable Selling Expenses 40.00 38.00 25.00 30.00 24.00 34.00 23.00 26.00 Total Variable Cost Per Unit 133.00 107.00 3,584,000.00 Total Common Fixed Costs 4,224,000.00 (Common Fixed Expenses per unit " Annual Capacity)

Financial Advantage Disadvantage) of buying 98000 products from Supplier Product Alpha Own Production Buying from Supplier Units 98,000.00 98,000.00 Sales Price 210.00 210.00 Variable Cost per Unit of Product 133.00 152.00 Contribution 77.00 58.00 Total Contribution 7,546,000.00 5,684,000.00 Less: Traceable Fixed Manifacturing Overhead 4,224,000.00 (Traceable Fixed Manifacturing overhead per unit * Annual Capacity) Total Common Fixed Costs 4,224,000.00 (Common Fixed Expenses per unit * Annual Capacity) 4,224,000.00 Net Income for the period (902,000.00) 1,460,000.00 The Financial Advantage of buying 98000 units from supplier instead of going to own production is that it will be able to increase its net income from -902,000 to 1,460,000

10 Financial Advantage Disadvantage) of buying 73000 products from Supplier Product Alpha Own Production Buying from Supplier 73,000.00 73,000.00 Units Sales Price 210.00 210.00 Variable Cost per Unit of Product 133.00 152.00 Contribution 77.00 58.00 4,234,000.00 Total Contribution 5,621,000.00 Less: Traceable Fixed Manifacturing Overhead 4,224,000.00 (Traceable Fixed Manifacturing overhead per unit * Annual Capacity) Total Common Fixed Costs 4,224,000.00 (Common Fixed Expenses per unit * Annual Capacity) 4,224,000.00 Net Income for the period (2,827,000.00) 10,000.00 The Financial Advantage of buying 73,000 units from supplier instead of going to own production is that it will be able to increase its net income from -2,827,000 to 10,000

Calculation no of pounds of raw material required for manifacture of One unit of eAch product Alpha $ Beta $ Direct Material cost per unit 40.00 24.00 Raw Material cost per pound of raw material $ 8.00 $ 8.00 No Of Pounds of raw material required per unit 5.00 3.00