Question

Cane Company manufactures two products called Alpha and Beta that sell for $ 150 and $ 105, respectively. Each product uses only one type of raw material that costs $ 5 per pound. The company has the capacity to annually produce 107,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

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?

Total common fixed expenses

3. Assume that Cane expects to produce and sell 85,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 15,000 additional Alphas for a price of $ 100 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

4. Assume that Cane expects to produce and sell 95,000 Betas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 5,000 additional Betas for a price of $ 44 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

5. Assume that Cane expects to produce and sell 100,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 15,000 additional Alphas for a price of $ 100 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 8,000 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?

6. Assume that Cane normally produces and sells 95,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

7. Assume that Cane normally produces and sells 45,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

8. Assume that Cane normally produces and sells 65,000 Betas and 85,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 20,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

9. Assume that Cane expects to produce and sell 85,000 Aiphas during the current year. A suppller has offered to manufacture and deliver 85,000 Alphas to Cane for a price of $ 100 per unit. What is the financial advantage (disadvantage) of buying 85,000 units from the supplier instead of making those units?

Answer 1

Answer 3 to 5 = Special order decision

Answer 6 to 8 = Discounting Decision

Answer 9 = Make or buy Decision

Answer 2
	Common Fixed cost per unit	Multiply: Annual Capacity	Common Fixed cost
Alpha	$          20	107,000	$        2,140,000
Beta	$          15	107,000	$        1,605,000
Total Common fixed Cost			$        3,745,000
Calculation Parts
		Alpha	Beta
Direct Materials		$          30.00	$                10.00
Direct Labor		$          25.00	$                20.00
Variable Manufacture Overhead		$          12.00	$                10.00
Variable Selling expenses		$          17.00	$                13.00
Total Variable Cost per unit		$          84.00	$                53.00
Answer 3
			Alpha
Sales Price per unit for Special order			$              100.00
Less: Unit Variable Cost			$                84.00
Unit Contribution margin for Special order			$                16.00
Multiply: Number of units for Special order			15,000
Financial Advantage			$            240,000
Answer 4
			Beta
Sales Price per unit for Special order			$                44.00
Less: Unit Variable Cost			$                53.00
Unit Contribution margin for Special order			$                (9.00)
Multiply: Number of units for Special order			5,000
Financial (Disadvantage)			$            (45,000)
Answer 5
			Alpha
Sales Price per unit for Special order			$              100.00
Less: Unit Variable Cost			$                84.00
Unit Contribution margin for Special order			$                16.00
Multiply: Number of units for Special order			15,000
Total Contribution margin from Special order			240,000
Less: Contribution margin Lost from Regular Sales (8000*(150-84))			528,000
Financial (Disadvantage)			$         (288,000)
Company Should not accept the special order.			Not accept
Answer 6
			Beta
Selling price of Beta			$                    105
Less: Unit Variable Cost			$                      53
Unit Contribution margin			$                      52
Multiply: Normally Units of Beat Sold			95,000
Lost in Contribution margin if Beta product line discounted			$        4,940,000
Traceable Fixed per unit			$                      23
Multiply: Annual Capacity			107,000
Saving in Traceable Fixed if Beta product line discounted			$        2,461,000
Saving in Traceable Fixed if Beta product line discounted			$        2,461,000
Less: Lost in Contribution margin if Beta product line discounted			$        4,940,000
Financial (Disadvantage)			$      (2,479,000)
Answer 7
			Beta
Selling price of Beta			$                    105
Less: Unit Variable Cost			$                      53
Unit Contribution margin			$                      52
Multiply: Normally Units of Beat Sold			45,000
Lost in Contribution margin if Beta product line discounted			$        2,340,000
Traceable Fixed per unit			$                      23
Multiply: Annual Capacity			107,000
Saving in Traceable Fixed if Beta product line discounted			$        2,461,000
Saving in Traceable Fixed if Beta product line discounted			$        2,461,000
Less: Lost in Contribution margin if Beta product line discounted			$        2,340,000
Financial Advantage			$            121,000
Answer 8
			Beta
Selling price of Beta			$                    105
Less: Unit Variable Cost			$                      53
Unit Contribution margin			$                      52
Multiply: Normally Units of Beat Sold			65,000
Lost in Contribution margin if Beta product line discounted			$        3,380,000
Traceable Fixed per unit			$                      23
Multiply: Annual Capacity			107,000
Saving in Traceable Fixed if Beta product line discounted			$        2,461,000
Increase in Contribution margin of alpha (20000*(150-84))			$        1,320,000
Add: Saving in Traceable Fixed if Beta product line discounted			$        2,461,000
Less: Lost in Contribution margin if Beta product line discounted			$        3,380,000
Financial Advantage			$            401,000
Answer 9
			Alpha
Direct Materials			$                30.00
Direct Labor			$                25.00
Variable Manufacture Overhead			$                12.00
Unit Variable manufacture Cost			$                67.00
Multiply: Units Normally required			85,000
Variable Manufacture Cost for Manufacture			5,695,000
Traceable Fixed per unit			$                      21
Multiply: Annual Capacity			107,000
Fixed Manufacture Cost for Manufacture			$        2,247,000
Variable Manufacture Cost for Manufacture			5,695,000
Fixed Manufacture Cost for Manufacture			$        2,247,000
Total relevant cost for Manufacture			$        7,942,000
Purchase price per unit			$                    100
Multiply: Units Normally required			85,000
Total relevant cost for Purchase			8,500,000
Less: Total relevant cost for Manufacture			$        7,942,000
Financial Advantage			$            558,000