Cane Company manufactures two products called Alpha and Beta that sell for $170

Question

Cane Company manufactures two products called Alpha and Beta that sell for $170 and $130, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 116,000 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.

Cane Company manufactures two products called Alpha and Beta that sell for $170 and $130, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 116,000 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.

1. What is the total amount of traceable fixed manufacturing overhead for the Alpha product line and for the Beta product line? Alpha ______ Beta ________

2. What is the company’s total amount of common fixed expenses? Total common fixed expenses ____________

3. Assume that Cane expects to produce and sell 90,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 20,000 additional Alphas for a price of $120 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease? Increases/Decreases by ___________

4. Assume that Cane expects to produce and sell 100,000 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 $49 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease?

Net Operating Income Increases/Decreases by ____________

5. Assume that Cane expects to produce and sell 105,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 20,000 additional Alphas for a price of $120 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 9,000 units.  

Calculate the incremental net operating income if the order is accepted?

Incremental net operating income_______

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Cane Company manufactures two products called Alpha and Beta that sell for $170 and $130, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 116,000 units of each product. Its unit costs for each product at this level of activity are given below:

Explanation / Answer

Answer 1. Traceable Fixed Manufacturing Overhead Alpha - 116,000 Units X $26                  3,016,000 Beta - 116,000 Units X $28                  3,248,000 Answer 2. Common Fixed Expenses Alpha - 116,000 X $25                  2,900,000 Beta - 116,000 X $20                  2,320,000 Total Common Fixed Expenses                  5,220,000 Answer 3. Statement of Incremental Profit If order is Accepted of Alpha - 20,000 Units Particulars Amount Increase in Sales (20,000 Units X $120)                   2,400,000 Less: Increase in Costs Variable Cost Direct Material (20,000 Units X $30)                    (600,000) Direct Labour (20,000 Units X $30)                    (600,000) Variable MOH (20,000 Units X $20)                    (400,000) Variable Selling Exp. (20,000 Units X $22)                    (440,000)                 (2,040,000) Incremental Profit / (Loss)                       360,000 Profit will be increased by $360,000, if order is Accepted. Note: We assumed that Variable Selling exp. Will be incurred on the Special order ia Accepted. Answer 4. Statement of Incremental Profit If order is Accepted of Beta - 3,000 Units Particulars Amount Increase in Sales (3,000 Units X $49)                       147,000 Less: Increase in Costs Variable Cost Direct Material (3,000 Units X $18)                      (54,000) Direct Labour (3,000 Units X $25)                      (75,000) Variable MOH (3,000 Units X $15)                      (45,000) Variable Selling Exp. (3,000 Units X $18)                      (54,000)                    (228,000) Incremental Profit / (Loss)                       (81,000) Profit will be decreased by $81,000, if order is Accepted. Note: We assumed that Variable Selling exp. Will be incurred on the Special order ia Accepted. Answer 5. Statement of Incremental Profit If order is Accepted of Alpha - 20,000 Units Particulars Amount Increase in Sales (20,000 Units X $120)                   2,400,000 Less: Increase in Costs Variable Cost Direct Material (20,000 Units X $30)                    (600,000) Direct Labour (20,000 Units X $30)                    (600,000) Variable MOH (20,000 Units X $20)                    (400,000) Variable Selling Exp. (20,000 Units X $22)                    (440,000) Loss of Contribution to Normal Customers - 9,000 X $68                    (612,000)                 (2,652,000) Incremental Profit / (Loss)                    (252,000) Contrbution per Unit = $170 - ($30+$30+$20+$22) = $68

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