Cane Company manufactures two products called Alpha and Beta that sell for $175
ID: 2474003 • Letter: C
Question
Cane Company manufactures two products called Alpha and Beta that sell for $175 and $135, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 117,000 units of each product. Its unit costs for each product at this level of activity are given below:
Direct materials
$
40
$
15
Direct labor
30
30
Variable manufacturing overhead
18
16
Traceable fixed manufacturing overhead
26
29
Variable selling expenses
23
19
Common fixed expenses
26
21
Total cost per unit
$
163
$
130
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.
1. What is the total amount of traceable fixed manufacturing overhead for the Alpha product line and for the Beta product line?
2. What is the company’s total amount of common fixed expenses?
3. Assume that Cane expects to produce and sell 91,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 21,000 additional Alphas for a price of $124 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease?
4. Assume that Cane expects to produce and sell 101,000 Betas during the current year. One of Cane’s sales representatives has found a new customer that is willing to buy 3,000 additional Betas for a price of $59 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease?
5. Assume that Cane expects to produce and sell 106,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 21,000 additional Alphas for a price of $124 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 10,000 units.
a. Calculate the incremental net operating income if the order is accepted?
b. Based on your calculations above should the special order be accepted?
Direct materials
$
40
$
15
Direct labor
30
30
Variable manufacturing overhead
18
16
Traceable fixed manufacturing overhead
26
29
Variable selling expenses
23
19
Common fixed expenses
26
21
Total cost per unit
$
163
$
130
Explanation / Answer
1. Traceable fixed manufacturing overhead :
Alpha: 117,000 x $ 26 = $ 3,042,000
Beta: 117,000 x $ 29 = $ 3,393,000
2. Total common fixed expenses = 117,000 ( $ 26 + $ 21) = $ 5,499,000
3. Contribution margin of Alpha = Selling price per unit - Variable costs per unit = $ 124 - $ ( 40 + 30 + 18 + 23) =
$ 13
Therefore, profits would increase by $ 13 x 21,000 or $ 273,000
4. Contribution margin of Beta = Selling price per unit - Variable costs per unit = $ 59 - $ ( 15 + 30 + 16 + 19) = $ (21)
If the order is accepted, the profits of Cane would decrease by $ 21 x 3,000 = $ 63,000
5. a. Incremental net operating income.
Loss of contribution from decreased sales = 10,000 ( $ 175 - $ 111) = $ 640,000
Contribution margin from special order = 21,000 ( $ 124 - $ 111) = $ 273,000
Incremental net operating income if the order is accepted = $ 273,000 - $ ( 640,000) = $ (367,000)
b. The special order should not be accepted, because Cane's overall operating income would decrease by $ 367,000
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