that costs $5 per pound. The company has the capacity to annually produce 107,000 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 $ 10 Direct labor 25 20 Variable manufacturing overhead 12 10 Traceable fixed manufacturing overhead 21 23 Variable selling expenses 17 13 Common fixed expenses 20 15 Total cost per unit $ 125 $ 91
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Cane Company manufactures two products called Alpha and Beta that sell for $150 and $105, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 107,000 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 | $ 10 |
| Direct labor | 25 | 20 |
| Variable manufacturing overhead | 12 | 10 |
| Traceable fixed manufacturing overhead | 21 | 23 |
| Variable selling expenses | 17 | 13 |
| Common fixed expenses | 20 | 15 |
| Total cost per unit | $ 125 | $ 91 |
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. Assume that Cane expects to produce and sell 95,000 Betas during the current year. One of Cane’s sales representatives has found a new customer who is willing to buy 5,000 additional Betas for a price of $44 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?
2. Assume that Cane’s customers would buy a maximum of 85,000 units of Alpha and 65,000 units of Beta. Also assume that the raw material available for production is limited to 166,000 pounds. How many units of each product should Cane produce to maximize its profits?
3. Assume that Cane’s customers would buy a maximum of 85,000 units of Alpha and 65,000 units of Beta. Also assume that the company’s raw material available for production is limited to 166,000 pounds. If Cane uses its 166,000 pounds of raw materials, up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)
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