Required information [The following information applies to the questions display

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Required information [The following information applies to the questions displayed below., Cane Company manufactures two products called Alpha and Beta that sell for $150 and $110, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 108,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha Beta 15 30 26 13 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit 24 14 16 $102 18 $130 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. 4. Assume that Cane expects to produce and sell 96,000 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 $45 per unit. What is the financial advantage (disadvantage) of accepting the new customers order? inancial (disadvantage) $ 34,000

Explanation / Answer

4 Revenue earned (2000*45) 90000 Less: Relavant costs (Note:1) 124000 Financial disadvantage -34000 Notes: 1. Capacity of beta =108000 units Expected tp produce and sell=96000 units Additional units required=2000 units Total=96000+2000=98000 units is within the capacity.Hence variable costs are the relavant costs.Fixed costs will incur within the capacity and hence can be ignored. Relavant cost: Direct materials 15 Direct labor 22 Variable manufacturing overhead 11 Variable selling expense 14 relavant cost 62 Total relavant cost for 2000 units=2000*62=$ 124000 5 Financial advantage (disadvantage) of discontinuing beta : Traceable fixed manufacturing overhead (108000*24) 2592000 Less: Contribution lost from beta (Note:2) 4608000 Financial disadvantage -2016000 Note: 2. Traceable fixed manufacturing overhead are avoidable costs Contribution=Sales-variable cost=110-(15+22+11+14)=48 per unit Total contribution lost for 96000 units=96000*48=$ 4608000 9 Make Buy For 86000 units Cost of buying (86000*104) 8944000 Direct materials (86000*30) 2580000 Direct labor (86000*26) 2236000 Variable manufacturing overhead (86000*13) 1118000 Traceable fixed manufacturing overhead (108000*22) 2376000 Variable selling expense (Note:3) 0 0 Common fixed expense (Note:3) 0 0 8310000 8944000 -634000 Note:3 selling expenses will incur in both make and Buy alternative.Hence, They are irrelavant for secision making Financial disadvantage=8944000-8310000=- 634000 11 Alpha Beta Direct materials (a) 30 15 Price per pound (b) 5 5 Pounds per unit (a)/(b) 6 3 12 Alpha Beta Selling price 150 110 Less: Variable costs Direct materials 30 15 Direct labor 26 22 Variable manufacturing overhead 13 11 Variable selling expense 18 87 14 62 Contribution margin (a) 63 48 Pounds per unit (b) 6 3 Contribution margin per pound (a)/(b) 10.5 16 13 Contribution margin per pound is higher with the Beta.Hence, first produce Beta completely and use the balance if any to Alpha. Pounds Per unit Units Produced Total Pounds 1 2 1*2 Beta 3 66000 198000 Alpha 6 2000 12000 (12000/6) (210000-198000) Total 210000 Alpha Beta Units to be produced 66000 2000

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