Question

Cane Company manufactures two products called Alpha and Beta that sell for $165 and $130, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 113,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Beta $ 24 Alpha $ 40 29 15 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit $154 $126 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 = 113000*$25 = $2,825,000

Total amount of traceable fixed manufacturing overhead for the Beta product line = 113000*$27 = $3,051,000

Solution 2:

Total amount of common fixed expenses = ($24 + $19) * 113000 = $4,859,000

Solution 3:

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

= $116 - ($40 + $29 + $15 + $21) = $11 per unit

If Cane accepts the customer’s offer for 10000 alpha, then increase in operating income = 19000*$11 = $209,000

Solution 4:

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

= $48 - ($24 + $25 + $14 + $17) = -$32

If Cane accepts the customer’s offer for 2000 Beta, then increase (decrease) in operating income = 2000*(-$32) = -$64,000

Solution 5:

Regular contribution margin per unit for Alpha = $165 - ($40 + $29 + $15 + $21) = $60 per unit

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

= $116 - ($40 + $29 + $15 + $21) = $11 per unit

If Cane accepts the customer’s offer for 19000 alpha, additional contribution margin from special order = 19000*$11 = $209,000

If Cane accept special order then loss of contribution margin on regular order = 10000*$60 = $600,000

Incremental net operating income if the order is accepted = $209,000 - $600,000 = ($391,000)

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