Question

Cane Company manufactures two products called Alpha and Beta that sell for $120 and $80, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 100,000 units of each product. Its average cost per unit for each product at this level of activity are given below:
Alpha BetaDirect Materials $30 $12Direct Labor 20 15Variable manufacturing overhead 7 5Traceable fixed manufacturing overhead 16 18Variable selling expenses 12 8Common fixed expenses 15 10Total cost per unit $100 $68
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.Required to Answer:1. What is the total amount of traceable fixed manufacturing overhead for the Alpha product line and for the Beta product line?2. What if the company's total amount of common fixed expenses?
3. Assume that Cane expects to produce and sell 80,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 10,000 additional Alphas for a price of $80 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 90,000 Betas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 5,000 additional Betas for a price of $39 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 95,000 Alphas during the current year. One of Cane's sale representatives has found a new customer willing to buy 10,000 additional Alphas for a price of $80 per unit. If Cane accepts the customer's offer, it will decrease Alpha sales to regular customers by 5,000 units. Should Cane accept this special order?

Answer 1

Answer and Explanation:

1) Total amount of traceable fixed manufacturing overhead for Alpha and Beta:

Traceable fixed overhead per unit                 $16 (Alpha)        $18 (Beta)

Level of activity                                                  100,000            100,000 units

Total Traceable Fixed Manufacturing            1600000               1800000

Overhead (16 x 100,000) (18 x 100,000)

2) Total amount of common fixed expenses

Common fixed expenses                                    $15                      $10

level of activity                                                    100,000            100,000 units

Total common fixed expenses                          1500000            1000000

Company's total common fixed expenses = 2500000

3) Alpha

Selling price/ unit                                  $80

DM                                                           30

DL                                                             20

V.MOH                                                      7

V.selling expense                                    12

Total cost/unit                                         $69

Incremental/unit                                        11

Increase in profit when order will be accepted = $110,000    

4) Beta

Selling price/unit                                        39

DM                                                               12

DL                                                                 15

V.MOH                                                        5

V.selling expense                                      18

Total cost/unit                                             50

Incremental loss per unit                          -11

Decrease in profit when order will be accepted = (55000)

5) Alpha

Selling price/unit                                         $80

DM                                                                 30

DL                                                                  20

V.MOH                                                           7

V.seling expense                                          12

Opportunity cost

(120 - 30 - 20 - 7  - 12 = 51 x 5000 =           25.50

255,000 ÷ 10,000)

Total cost per unit                                         94.50

Loss per unit                                                 (14.50)

Increase in profit                                        145,000