Cane Company manufactures two products called Alpha and Beta that sell for $140
ID: 2474253 • Letter: C
Question
Cane Company manufactures two products called Alpha and Beta that sell for $140 and $100, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 106,000 units of each product. Its unit costs 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 deemed unavoidable and have been allocated to products based on sales dollars.
Assume that Cane expects to produce and sell 84,000 Alphas during the current year. One of Cane's
sales representatives has found a new customer that is willing to buy 14,000 additional Alphas for a price of $96 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease? (Input the amount as positive value.)
Cane Company manufactures two products called Alpha and Beta that sell for $140 and $100, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 106,000 units of each product. Its unit costs for each product at this level of activity are given below:
Explanation / Answer
Solution:
Statement of Profit if company not accept the offer of 14,000 addition units or accept the offer
If not accept the offer
If accept the offer
Increase / (Decrease)
Produce and Sell Unit
84,000
98,000
Sale Price Per Unit
$140
$140
Sale Value
$11,760,000
$13,720,000
Expenses:
Direct Material
$2,688,000
$3,136,000
Direct Labor
$2,016,000
$2,352,000
Variable Manufacturing Overhead
$840,000
$980,000
Variable Selling Expenses
$1,344,000
$1,568,000
Total Variable Cost
$6,888,000
$8,036,000
Contribution Margin
(Sale - Total Variable Cost)
$4,872,000
$5,684,000
Traceable Fixed Manufacturing Overhead
$2,120,000
$2,120,000
Common Fixed Expenses
$2,014,000
$2,014,000
Total Fixed Cost
$4,134,000
$4,134,000
Operating Profit
(Contribution - Total Fixed Cost)
$738,000
$1,550,000
$812,000
If Cane accepts the customer’s offer, its profits will be increased by $812,000
We can also solve this question by taking only variable costing system. Because fixed cost are common in both the situation, whether company accept or reject the offer fixed cost will be the same. Hence it is irrelevant for decision making whether to accept of reject.
From the statement upto Contribution margin, the difference of contribution margin is $812,000.. Hence the profit of company will be increase by $812,000 is they accept the offer of additional 14,000 Units.
If not accept the offer
If accept the offer
Increase / (Decrease)
Produce and Sell Unit
84,000
98,000
Sale Price Per Unit
$140
$140
Sale Value
$11,760,000
$13,720,000
Expenses:
Direct Material
$2,688,000
$3,136,000
Direct Labor
$2,016,000
$2,352,000
Variable Manufacturing Overhead
$840,000
$980,000
Variable Selling Expenses
$1,344,000
$1,568,000
Total Variable Cost
$6,888,000
$8,036,000
Contribution Margin
(Sale - Total Variable Cost)
$4,872,000
$5,684,000
Traceable Fixed Manufacturing Overhead
$2,120,000
$2,120,000
Common Fixed Expenses
$2,014,000
$2,014,000
Total Fixed Cost
$4,134,000
$4,134,000
Operating Profit
(Contribution - Total Fixed Cost)
$738,000
$1,550,000
$812,000
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