Super Company manufactures two products called Alpha and Beta that sell for $120 and $80

respectively. Each
company has the capacity to annually produce 100,000 units of each product. Its units costs for each product a

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 consideres its traceble fixed manufacturing overhead to be avoidable, whereas its common fixed
based on sales dollars.

1. What is the total amount of traceable fixed manufacturing overhead for the Alpha product line and for

Alpha Beta
Traceable fixed overhead per unit $16 $18
Level of activity in units 100,000 100,000
Total traceable fixed overhead $1,600,000 $1,800,000

2. What is the Company's total amount of common fixed expenses?

Alpha Beta
Common fixed expenses per unit $15 $10
Level of activity in units 100,000 100,000
Total common fixed expenses $1,500,000 $1,000,000

3. Assume that Super expects to produce and sell 80,000 Alphas during the current year. One of Super's
10,000 additional Alphas for a price of $80 per unit. If Super accepts the customer's offer, how much will

Per Total
Unit 10,000 units
Incremental revenue $80 $800,000
Incremental costs:
Variable costs:
Direct materials 30 300,000
Direct labor 20 200,000
Variable manufacturing overhead 7 70,000
Variable selling expenses 12 120,000
Total variable cost $69 690,000
Incremental net operating income $110,000 Increase

4. Assume that Super expects to produce and sell 90,000 Betas during the current year. One of the Supe
buy 5,000 additional Betas for a price of $39 per unit. If Super accepts the customer's offer, how much w
Per Total
Unit 5,000 units
Incremental revenue $39 $195,000
Incremental costs:
 Variable costs:
Direct materials 12 60,000
Direct labor 15 75,000
Variable manufacturing overhead 5 25,000
Variable selling expenses 8 40,000
Total variable cost $40 200,000
Incremental net operating income -$5,000 decrease

5. Assume that Super expects to produce and sell 95,000 Alphas during the current year. One of the Sup
buy 10,000 additional Alphas for a price of $80 per unit. If Super accepts the customer's offer, it will decr
accept this special order?
**Make your own template
Per Total
Unit 10,000 units
Incremental revenue $80 $800,000
Incremental costs:
Variable costs:
Direct materials 30 300,000
Direct labor 20 200,000
Variable manufacturing overhead 7 70,000
Variable selling expenses 12 120,000
Total variable cost $69 690,000
Selling Price $120
Loss From Regulars $51 $255,000
Incremental net operating income -$145,000 Decrease

6. Assume that Super normally produces and sells 90,000 Betas per year. If Super dicountinues the Beta

Contribution margin lost if the Beta product

$3,600,000
line is dropped*
Traceable fixed manufacturing overhead 1,800,000
Decrease in net operating income if Beta is
$1,800,000
dropped

7. Assume that Super normally produces and sells 40,000 Betas per year. If Super discontinues the Beta

Contribution margin lost if the Beta product

$1,600,000
line is dropped*
Traceable fixed manufacturing overhead 1,800,000
Increase in net operating income if Beta is
$200,000
dropped

8. Assume that Super normally produces and sells 60,000 Betas and 80,000 Alphas per year. If Super dis
increase sales of Alpha by 15,000 units. If Super discontinues the Beta product line, how much would pr

Contribution margin lost if the Beta product

$2,400,000
line is dropped
Traceable fixed manufacturing overhead 1,800,000
Contribution margin on additional Alpha
$765,000
sales*
Increase in net operating income if Beta is
$165,000
dropped

9. Assume that Super expects to produce and sell 80,000 Alphas during the current year. A supplier has
of $80 per unit. If Super buys 80,000 units from the supplier instead of making those units, how much wi
** Make your own template Per Total
Unit 80000 Units
Incremental revenue $120 $9,600,000
Incremental costs:
Variable costs:
Direct materials 30 2,400,000
Direct labor 20 1,600,000
Variable manufacturing overhead 7 560,000
Traceable Fixed Overhead 16 1,600,000
Total variable cost $57 4,560,000
Selling Price $120

Incremental Net Operating Income 3,440,000

Supplier Unit 10000 units

Selling Point 120 9600000
Purchase Cost 80 6400000
Operating income 3200000

Total Decrease -240,000

10. Assume that Super expects to produce and sell 50,000 Alphas during the current year. A supplier has
of $80 per unit. If Super buys 50,000 units from the supplier instead of making those units, how much wi
** Make your own template
Per Total
In House Unit 50,000 units
Incremental revenue 120 $ 6,000,000.00
Incremental costs:
Variable costs:
Direct materials 30 $ 1,500,000.00
Direct labor 20 $ 1,000,000.00
Variable manufacturing overhead 7 $ 350,000.00
Traceable fixed overhead 16 $ 1,600,000.00
Total variable cost 57 $ 2,850,000.00
Selling Price 120

Incremental net operating income $ 1,550,000.00

Supplier Unit 10000 Units

Selling point 120 $ 6,000,000.00
Purchase cost 80 $ 4,000,000.00
Operating Income $ 2,000,000.00

Increase of $ 450,000.00

11. How many pounds of raw material are needed to make one unit of Alpha and one unit of Beta?
Alpha Beta
Direct material cost per unit $30 $12
Cost per pound of direct materials $6 $6
Pounds of direct materials per unit 5 2

12. What contribution margin per pound of raw material is earned by Alpha and Beta?
Alpha Beta
Selling price per unit $120 $80
Variable cost per unit $69 $40
 Contribution margin per unit $51 $40
Pounds of direct material required to
5 2
produce one unit
Contribution margin per pound $10.20 $20.00

13. Assume that Super's customers would buy a maximum of 80,000 units of Alpha and 60,000 units of B
production is limited to 160,000 pounds. How many units of each product should Super produce to maxi

Pounds Units Total

Product
Per Unit Produced Pounds
Beta 5 8,000 40,000
Alpha 2 60,000 120000
Total pounds available 160000 160000 160,000

14. If Super follows your recommendation in requirement 13, what total contribution margin will it earn?
Alpha Beta
Number of units produced 8,000 60,000
Contribution margin per unit $51 $40
Total contribution margin $408,000 $2,400,000

15. If Super uses its 160,000 pounds of raw materials as you recommended in requirement 13, up to how much
materials?
Alpha
Regular direct material cost per pound 6
Contribution margin per pound of direct
$10.20
materials
Maximum price to be paid per pound $16.20
 and $80 respectively. Each product uses only one type of raw material that cost $6 per pound. The
ts costs for each product at this level of activity are given below.

whereas its common fixed expenses are deemed unavoidable and have been allocated to products

Alpha product line and for the Beta product line?

rrent year. One of Super's sales representatives has found a new customer that is willing to buy
mer's offer, how much will its profits increase or decrease?

ent year. One of the Super's slaes representatives has found a new customer that is willing to
omer's offer, how much will its profits increase or decrease?
 rrent year. One of the Super's sales representatives has found a new customer that is willing to
ustomer's offer, it will decrease Alpha sales to regular customers by 5,000 units. Should Super

per dicountinues the Beta product line, how much will profits increase or decrease?

per discontinues the Beta product line, how much will profits increase or decrease?

phas per year. If Super discontinues the Beta product line, its sales representatives could
t line, how much would profits increase or decrease?

rrent year. A supplier has offered to manufacture and deliver 80,000 Alphas to Super for a price
those units, how much will profits increase or decrease?
urrent year. A supplier has offered to manufacture and deliver 50,000 Alphas to Super for a price
those units, how much will profits increase or decrease?

d one unit of Beta?

d Beta?
 lpha and 60,000 units of Beta. Also assume that the company's raw material available for
uld Super produce to maximize its profits?

margin will it earn?

rement 13, up to how much should it be willing to pay per pound for additional raw
Troy manufactures a variety of engines for use in heavy equipment. The Company has always produced all of
sell one type of carburetor to Troy, for a cost of $35 per unit. To evaluate this offer, Troy has gathered the follo

15,000 units
Per unit per year
Direct materials $14 $ 21,000
Direct labor 10 $ 1,500,000
Variable Manufacturing Overhead 3 $ 450,000
Traceable fixed manufacturing overhead ** 6 $ 90,000
Fixed Manufacturing overhead allocated 9 $ 135,000
Total cost per unit $42 $6,300,000

** One third supervisory salaries, two thirds depreciation of special equpment (no resale value)

1. Assuming that the company has no alternative use for the facilites that are now being used to produce the

Per Unit Differential Costs

Make Buy
Cost of purchasing $35
Direct materials $14
Direct labor 10
Variable manufacturing overhead 3
Fixed manufacturing overhead,
2
traceable1
Fixed manufacturing overhead, common
Total costs $29 $35

Difference in favor of continuing to make

$6
the carburetors

2. Suppose that if the carburetors were purchased, Troy could use the free capacity to launch a ne
would be $150,000 per year. Should Troy accept the offer to buy the carburetors for $35 per unit?

Make Buy
Cost of purchasing $525,000
Cost of making $435,000
Opportunity cost—segment margin
150000
foregone on a potential new product line
Total cost $585,000 $525,000

Difference in favor of purchasing from

-$60,000
the outside supplier
any has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to
ffer, Troy has gathered the following information relating to its own cost of producing the carburetor internally.

150000

(no resale value)

now being used to produce the carburetors, should the outside supplier's offer be accepted? Show all the procedure

15,000 units
Make Buy
$525,000
$210,000
150,000
45,000
30,000

$435,000 $525,000

$90,000

ree capacity to launch a new product. The segment margin of the new product
arburetors for $35 per unit? Show all the procedure
utside supplier has offered to
ternally.

he procedure
1. Define the following terms:
(a) incremental cost

A cost that changes with actio

(b) opportunity cost

Lost gains from choosing another option
(c) sunk cost
A cost already paid for that cannot be recovered
(d) relevant cost
A cost used in determining options to choose from

2. Are variable costs always relevant costs? Explain.

No, sometimes they do not differ between alternatives

3. “All future costs are relevant in decision making.” Do you agree? Why or why not?

No, only future costs that are different for alternatives are relevant

4. How does opportunity cost enter into a make or buy decision?

As seen on the second problem opportunity costs affect decision making as you can see potential losses in

5. “ If a product is generating a loss, then it should be discontinued.” Do you agree? Explain.

To an extent. Sometimes a product can be losing money but gaining other types of captual for a company. E
might inlcude Amazon's business plan for the first 10 years or even twitter as of late.
r why not?

n see potential losses in profits.

ou agree? Explain.

captual for a company. Examples of this

e.