Cane Company manufactures two products called Alpha and Beta that sell for $130
ID: 2530149 • Letter: C
Question
Cane Company manufactures two products called Alpha and Beta that sell for $130 and $90, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 102,000 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. Questions: (Please show all work/steps)
4. Assume that Cane expects to produce and sell 92,000 Betas during the current year. One of Cane’s sales representatives has found a new customer who is willing to buy 2,000 additional Betas for a price of $41 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?
5. Assume that Cane expects to produce and sell 97,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 12,000 additional Alphas for a price of $88 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 7,000 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??
9. Assume that Cane expects to produce and sell 82,000 Alphas during the current year. A supplier has offered to manufacture and deliver 82,000 Alphas to Cane for a price of $88 per unit. What is the financial advantage (disadvantage) of buying 82,000 units from the supplier instead of making those units?
10. Assume that Cane expects to produce and sell 52,000 Alphas during the current year. A supplier has offered to manufacture and deliver 52,000 Alphas to Cane for a price of $88 per unit. What is the financial advantage (disadvantage) of buying 52,000 units from the supplier instead of making those units?
Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit Alpha Beta $10 21 7 20 10 12 $ 25 17 18 14 17 $113 $ 80Explanation / Answer
4). Assuming Company expect to produce and sell only 92000 betas during the current year.
A new customer willing to buy 2000 units of beta at $41 only.
Relevant cost for additional 2000 betas:
Direct Material 10
Direct Labour 21
Variable mfr overhead 7
Variable selling 10
Total Variable costs 48
Net disadvantage of accepting the order is $7 per unit ( 41-48) which totals to $7*2000 units = $14000
5). Assuming company expects to produce and sell only 97000 alphas during the year.
New order for 12000 alphas at price oof $88 is received .
Relevant cost for additional units of 5000 alphas:
Direct Material 25
Direct Labour 22
Variable mfr overhead 17
Variable selling 14
Total Variable costs 78
While another 7000alphas to be setoff from outside customer sales which are at price of $130
Net Advantage or (Disadvantage) for accepting the order is
= (12000*88) - (7000*130) - (5000*78) = 1056000-910000-390000 = $(244000).i.e Net Disadvantage
Hence the order should not be accepted.
9). If cane starts buying 82000 alphas from supplier instead of making them:
The Profit from buying and selling alphas is : (130-88) * 82000 = $3,444,000
And total unovidable cost is = $17*102000 units = $1,734,000
Net profit from buying and selling alphas = 3,444,000 - 1,734,000 = $ 1,710,000
If company manufactures and sell alphas, then the profit to company is :
Contribution = (130-78)*82000 = $4264000
Less fixed costs = (18+17)*102000 = $3570000
Net profit = 4264000 - 3570000 = $694000
From above calculations it is clear that profit is higher in case of buying and selling alphas
Net Advantage form buying alphas and selling : $1,710,000 - $694,000 = $1,016,000
10). If cane produces and sells 52000 alphas.
If cane buys and sells 52000 alphas:
Profit is (130-88)*52000 = 2184000
Less unavoidable fixed cost = 1734000
Net Profit = 2184000-1734000 = $450000
If cane makes and sells alphas::
Contribution = (130-78)*52000 = $2704000
Less fixed costs = (18+17)*102000 = $3570000
Net loss = 2704000 - 3570000 = -866000
Net Advantage form buying alphas and selling : 450000 - (866000) = $1,316,000
Hence it is advisable to buy and sell alphas instead of manufacturing them,
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