Question

Cane Company manufactures two products called Alpha and Beta that sell for $185 and $120, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 112,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	30			$	10
Direct labor			22				29
Variable manufacturing overhead			20				13
Traceable fixed manufacturing overhead			24				26
Variable selling expenses			20				16
Common fixed expenses			23				18
Total cost per unit		$	139			$	112

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.

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

3. Assume that Cane expects to produce and sell 88,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 18,000 additional Alphas for a price of $112 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

4. Assume that Cane expects to produce and sell 98,000 Betas during the current year. One of Cane’s sales representatives has found a new customer who is willing to buy 4,000 additional Betas for a price of $47 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

5. Assume that Cane expects to produce and sell 103,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 18,000 additional Alphas for a price of $112 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 9,000 units.

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

b. Based on your calculations above should the special order be accepted?

7. Assume that Cane normally produces and sells 48,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

11. How many pounds of raw material are needed to make one unit of each of the two products?

12. What contribution margin per pound of raw material is earned by each of the two products? (Round your answers to 2 decimal places.)

Answer 1

2. Total amount of common fixed expenses = (112000 x $23) + (112000 x $18) = $2576000 + $2016000 = $4592000

3. Financial advantage (disadvantage): $360000

	Alphas
	Per unit $
Sales	112
Less: Variable costs
Direct materials	30
Direct labor	22
Manufacturing overhead	20
Selling expenses	20
Total variable costs	92
Contribution per unit $	20
Number of units ordered	18000
Financial advantage $	360000

Traceable fixed manufacturing overhead and common fixed expenses are irrelevant as the same would be incurred whether the new customer's order is accepted or not and hence not considered.

4. Financial advantage (disadvantage): ($84000)

	Betas
	Per unit $
Sales	47
Less: Variable costs
Direct materials	10
Direct labor	29
Manufacturing overhead	13
Selling expenses	16
Total variable costs	68
Contribution per unit $	-21
Number of units ordered	4000
Financial (disadvantage) $	-84000

Traceable fixed manufacturing overhead and common fixed expenses are irrelevant as the same would be incurred whether the new customer's order is accepted or not and hence not considered.

5a. Financial advantage (disadvantage): ($477000)

	Existing customers-decrease Alphas (9000 units)		New customer- Alphas (18000 units)		Differential: Increase (Decrease) in net operating income
	Per unit $	Total $	Per unit $	Total $
Selling price	185	1665000	112	2016000	351000
Less: Variable costs
Direct materials	30	270000	30	540000	-270000
Direct labor	22	198000	22	396000	-198000
Manufacturing overhead	20	180000	20	360000	-180000
Selling expenses	20	180000	20	360000	-180000
Total variable costs	92	828000	92	1656000	-828000
Net operating income		837000		360000	-477000

The traceable fixed expenses and common fixed expenses are irrelevant as they will not change whether the Alphas are sold to existing customers or to a new customer.

5b. No.

The special order should not be accepted since it would result in a financial disadvantage of $477000.

Per HOMEWORKLIB RULES, the first 4 parts have been answered. Please post the remaining separately. Thank you.