Question

Required information [The following information applies to the questions displayed below.] Cane Company manufactures two products called Alpha and Beta that sell for $180 and $145, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 118,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Beta $ 24 27 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit Alpha $ 36 32 19 27 24 17 30 20 27 22 $165 $140 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 1:

Total amount of traceable fixed manufacturing overhead for the Alpha product line = 118000*$27 = $3,186,000

Total amount of traceable fixed manufacturing overhead for the Beta product line = 118000*$30 = $3,540,000

Solution 3:

Contribution margin per unit on special order of alpha= Selling price - Variable cost per unit

= $128 - ($36 + $32 + $19 + $24) = $17 per unit

If Cane accepts the customer’s offer for 22000 alpha, then increase in operating income = 22000*$17 = $374,000

Solution 5:

Regular contribution margin per unit for Alpha = $180 - ($36 + $32 + $19 + $24) = $69 per unit

Contribution margin per unit on special order of alpha= Selling price - Variable cost per unit

= $128 - ($36 + $32 + $19 + $24) = $17 per unit

If Cane accepts the customer’s offer for 22000 alpha, additional contribution margin from special order = 22000*$17 = $374,000

If Cane accept special order then loss of contribution margin on regular order = 11000*$69 = $759,000

Incremental net operating income if the order is accepted = $374,000 - $759,000 = ($385,000)

As there is net financial disadvantage, therefore special order should not be accepted.

Solution 6:

Differential Analysis - Sale Beta (102000 units) (alt 1) or Discontinue Beta (Alt2)
Particulars	Sale Beta (102000 Units) (Alt 1)		Discontinue Beta (Alt 2)		Differential effect on income (Alt 2)
	Details	Amount	Details	Amount
Revenue	102000*$145	$14,790,000.00		$0.00	-$14,790,000.00
Costs:
Direct Material	102000*$24	$2,448,000.00		$0.00	-$2,448,000.00
Direct Labor	102000*$27	$2,754,000.00		$0.00	-$2,754,000.00
Variable manufacturing Overhead	102000*$17	$1,734,000.00		$0.00	-$1,734,000.00
Variable Selling Expenses	102000*$20	$2,040,000.00		$0.00	-$2,040,000.00
Traceable Fixed manufacturing overhead	118000*$27	$3,186,000.00		$0.00	-$3,186,000.00
Common fixed expenses	118000*$27	$3,186,000.00	118000*$27	$3,186,000.00	$0.00
Income / (Loss)		-$558,000.00		-$3,186,000.00	-$2,628,000.00

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