Question

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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: Beta $ 24 Alpha $ 40 38 25 34 23 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit 33 28 $199 $ 171 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.

Answer 1

Solution Alpha Beta Selling price per unit $210 $172 Variable cost per unit Direct materials $40 $24 Direct labor $38 $34 Variable manufacturing overhead $25 $23 Variable selling expenses Total Variable cost per unit $30 $26 $133 $107 Contribution Margin per Unit (Selling price - Variable cost) $77 $65 Required 1.: Total amount of Traceable Fixed Manufacturing Overheads Alpha Beta (a) Traceable fixed manufacturing O/H per unit $33 $36 128.000 (b) Annual production capacity of each product 128,000 Total amount of Traceable Fixed Manufacturing Overheads (a x b) $4,224,000 $4,608,000 Traceable Fixed Manufacturing Overheads Alpha Beta $4,224,000 $4,608,000 Required 2.: Company's total amount of Common fixed expenses Alpha Total Beta (a) Common fixed expenses applied per unit $33 $28 (b) Annual production capacity of each product Total amount of Common fixed expenses (a x b) 128,000 128,000 $4,224,000 $3,584,000 $7,808,000 Required 3.: Since the total capacity to produce the Alphas is 128,000 units, the idle capacity is 30,000 units (128,000 98,000), which is sufficient to meet the requirement of 28,000 units order from new customer without decreasing the supply to the regular customers. The company shall accept the new customer's order only if it will result into additional profit to the Company. We shall analyze the financial advantage or disadvantage of accepting the new customer's order as under: Incremental Revenue from new order ($152 x 28,000 units) $4,256,000 Less: Incremental Variable cost of new order ($133 x 28,000 units) ($3,724,000) $532,000 $0 Incremental contribution margin from new order Less: Incremental fixed costs Financial advantage (disadvantage) of accepting the new customer's order $532,000 Financial Advantage $532,000 The new customer's special order of 28,000 units of Alphas must be accepted as it would result into financial advantage of $532,000 to the company. Required 4. Since the total capacity to produce the Betas is 128,000 units, the idle capacity is 20,000 units (128,000 108,000), which is sufficient to meet the requirement of 3,000 units order from new customer without decreasing the supply to the regular customers. The company shall accept the new customer's order only if it will result into additional profit to the Company. We shall analyze the financial advantage or disadvantage of accepting the new customer's order as under: Incremental Revenue from new order ($81 x 3,000 units) $243,000 ($321,000) ($78,000) $0 ($78,000) Less: Incremental Variable cost of new order ($107 x 3,000 units) Incremental contribution margin from new order Less: Incremental fixed costs Financial advantage (disadvantage) of accepting the new customer's order Financial (Disadvantage) ($78,000) The new customer's special order of 3,000 units of Betas must not be accepted as it would result into financial disadvantage of $78,000 to the company.