[The following information applies to the questions displayed below. Cane Compan

Question

[The following information applies to the questions displayed below. 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 unit costs for each product at this level of activity are given below: Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Alpha Beta $30 $10 20 10 23 13 15 25 12 21 17 20 Total cost per unit $125 $ 91 The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are deemed unavoidable and have been allocated to products based on sales dollars.

Explanation / Answer

Ans 1 Traceable Fixed Manufacturing Cost Amount $ Alpha 107000*21 2247000 Beta 107000*23 2461000 Ans 2 Common fixed expenses 107000*2*(17+13) 6420000 Ans 3 We have to calculate the relevant cost which incldes variable cost Fixed cost will be incurred irrespective of the special order accepted or not so fixed cost is irrelevant Special order per unit Alpha   $ No. of units 15000 Sales (15000*100) 100 1500000 Less: variable Cost Direct material 30 450000 Direct Labour 25 375000 Variable manufacturing Overhead 12 180000 Variable Selling Expenses 17 255000 Total relevant Cost 1260000 Increase in profits 240000 Net operating inc0me increase by $240000 Ans 4 We have to calculate the relevant cost which incldes variable cost Fixed cost will be incurred irrespective of the special order accepted or not so fixed cost is irrelevant Special order per unit Beta   $ No. of units 5000 Sales (15000*100) 44 220000 Less: variable Cost Direct material 10 50000 Direct Labour 20 100000 Variable manufacturing Overhead 10 50000 Variable Selling Expenses 13 65000 Total relevant Cost 265000 Decrease in profits -45000 Net operating incme decrease by $45000 Ans 5 Special order per unit Alpha   $ No. of units 15000 Sales (15000*100) 100 1500000 Less: variable Cost Direct material 30 450000 Direct Labour 25 375000 Variable manufacturing Overhead 12 180000 Variable Selling Expenses 17 255000 Contribution foregone 528000 Total relevant Cost 1788000 Decrease in profits -288000 Contribution on 8000 units will be sacrificied if this order is accepted so this is also relevant cost Selling price per unit 150 Direct material 30 Direct Labour 25 Variable manufacturing Overhead 12 Variable Selling Expenses 17 Contribution per unit 66 No.of Units 8000 Cost 528000 b) No, the special order should not be accepted

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