Cane Company manufactures two products called Alpha and Beta that sell for $185

Question

Cane Company manufactures two products called Alpha and Beta that sell for $185 and $120, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 112,000 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.

1. What is the total amount of traceable fixed manufacturing overhead for each of the two products?

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

3. Assume that Cane expects to produce and sell 88,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 18,000 additional Alphas for a price of $112 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

4. Assume that Cane expects to produce and sell 98,000 Betas during the current year. One of Cane’s sales representatives has found a new customer who is willing to buy 4,000 additional Betas for a price of $47 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

5. Assume that Cane expects to produce and sell 103,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 18,000 additional Alphas for a price of $112 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 9,000 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?

6. Assume that Cane normally produces and sells 98,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

7. Assume that Cane normally produces and sells 48,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

8. Assume that Cane normally produces and sells 68,000 Betas and 88,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 12,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

9. Assume that Cane expects to produce and sell 88,000 Alphas during the current year. A supplier has offered to manufacture and deliver 88,000 Alphas to Cane for a price of $112 per unit. What is the financial advantage (disadvantage) of buying 88,000 units from the supplier instead of making those units?

10. Assume that Cane expects to produce and sell 58,000 Alphas during the current year. A supplier has offered to manufacture and deliver 58,000 Alphas to Cane for a price of $112 per unit. What is the financial advantage (disadvantage) of buying 58,000 units from the supplier instead of making those units?

Alpha Beta Direct materials $ 30 $ 10 Direct labor 22 29 Variable manufacturing overhead 20 13 Traceable fixed manufacturing overhead 24 26 Variable selling expenses 20 16 Common fixed expenses 23 18 Total cost per unit $ 139 $ 112

Explanation / Answer

3)since cane has extra capacity available for manufacturing 18000 units of aplha    [112000-88000=24000]   .it can accept the offer without affecting regular sales.

since fixed cost will be incurred whether offer is accepted or not ,it is irrelevant in decision making .

Variable cost of alpha : Direct material +direct labor +variable overhead +variable selling

                              = 30+22+20+20=92

Financial advantage /(disadvantage) = 18000 [112-92] = 360000

4)since cane has extra capacity available for manufacturing 4000 units of beta    [112000-98000=14000]   .it can accept the offer without affecting regular sales.

since fixed cost will be incurred whether offer is accepted or not ,it is irrelevant in decision making .

Variable cost of beta : Direct material +direct labor +variable overhead +variable selling

                              = 10+29+13+16

                              = 68

Financial advantage /(disadvantage) = 4000[47-68]

                        = -84000 disadvantage

5)Contribution loss from regular sales due to acceptance of offer = units sales loss [regular selling price -variable cost]

9000 [185 - 92]

(837000)

Incremental income /(loss) from special offer = 18000[112-92]= 360000

financial advantage (disadvantage) of accepting the new customer’s order = 360000+ (-837000)

               360000-837000

                   (477000)

b)offer should not be accepted as there is a financial disadvantage

6)

financial advantage (disadvantage) of discontinuing the Beta product line = -2016000 - 168000

                 = - 2184000 disadvantage

continue Discontinue sales 98000*120=11760000 0 variable cost [calculated inpart 4] 98000*68 = (6664000) 0 contribution 5096000 .0 less:Traceable fixed manufacturing overhead (2912000)    [112000*26] 0 common fixed cost (2016000)    [112000*18] (2016000) net income 168000 (2016000)

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