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 Beta
Direct materials $ 30 $ 12
Direct labor 20 15
Variable manufacturing overhead 7 5
Traceable fixed manufacturing overhead 16 18
Variable selling expenses 12 8
Common fixed expenses 15 10
Total cost per unit $ 100 $ 68
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.
Required: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?

Answer and Explanation:

1. The total amount of traceable fixed manufacturing overhead is given below:-

                                                 Alpha            Beta

Number of units produced   100,000       100,000

Traceable fixed

manufacturing overhead      $16                 $18

Total amount of traceable fixed

manufacturing overhead $1,600,000  $1,800,000

2. The total amount of common fixed expenses is given below:-

                                                 Alpha            Beta

Number of units produced   100,000       100,000

Common fixed

manufacturing overhead       $15                 $10

Total amount of common fixed

manufacturing overhead     $1,500,000  $1,000,000

3. The computation of increase or decrease of profit is shown below:-

Selling price                        $80

Less: Variable cost

Direct material                   ($30)

Direct labor                        ($20)

Variable manufacturing

overhead                             ($7)

Contribution margin           $23

Less: Variable selling

expenses                            ($12)

Profit per unit                       $11

Total profit increase

(10,000 × $11)                      $110,000

The computation of increase or decrease of profit is as shown below:-

Selling price                        $39

Less: Variable cost

Direct material                   ($12)

Direct labor                        ($15)

Variable manufacturing

overhead                             ($5)

Contribution margin           $7

Less: Variable selling

expenses                            ($8)

Profit per unit                       ($1)

Total profit decrease

(5,000 × -$1)                      -($5,000)

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