[The following information applies to the questions displayed below.] Cane Compa

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[The following information applies to the questions displayed below.]

Cane Company manufactures two products called Alpha and Beta that sell for $225 and $175, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 130,000 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 99,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 29,000 additional Alphas for a price of $156 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

5. Assume that Cane expects to produce and sell 114,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 29,000 additional Alphas for a price of $156 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 13,000 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?

7. Assume that Cane normally produces and sells 59,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

8. Assume that Cane normally produces and sells 79,000 Betas and 99,000 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 99,000 Alphas during the current year. A supplier has offered to manufacture and deliver 99,000 Alphas to Cane for a price of $156 per unit. What is the financial advantage (disadvantage) of buying 99,000 units from the supplier instead of making those units?

Alpha Beta Direct materials $ 42 $ 24 Direct labor 42 32 Variable manufacturing overhead 26 24 Traceable fixed manufacturing overhead 34 37 Variable selling expenses 31 27 Common fixed expenses 34 29 Total cost per unit $ 209 $ 173

Explanation / Answer

Step 1:The total amount of traceable fixed manufacturing overhead for each of the two products

Step 2:Company’s total amount of common fixed expenses

Step 3:Assuming that Cane expects to produce and sell 99,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 29,000 additional Alphas for a price of $156 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order

Advantage :The order from new customer should be accepted as it will help in reducing the loss that Product Alpha is incurring currently. It will reduce loss from $5,24,000 to $89,000.

Step 4:Assuming that Cane expects to produce and sell 114,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 29,000 additional Alphas for a price of $156 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 13,000 units.

Decision :The order of 29,000 units from new customer should not be accepted in total as it will results in reduction in existing contribution margin. However, the company can accept the new order upto units (130000-114000) i.e. 16000 units can be accepted as it will create additional contribution to company.

Particulars Alpha Beta Capacity to annually produce 130,000 130,000 Traceable fixed manufacturing overhead per unit $34 $37 Traceable fixed manufacturing overhead $44,20,000 $48,10,000

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