Question

Gage Company manufactures two products Model A and Model B 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 unit costs for each product at this level of activity are given below:

	Model A	Model B
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 deemed unavoidable and have been allocated to products based on sales dollars.

Answer the following 7 questions (you may add lines if needed) and

1. What is the total amount of traceable fixed manufacturing overhead for the Model A product line and for the Model B product line assuming they expect to produce 100,000 units.

	Model A	Model B

1. What is the company's total amount of common fixed expenses?

	Model A	Model B	Total

1. Assume that Gage expects to produce and sell 80,000 Model As during the current year. One of Gage's sales representatives has found a new customer that is willing to buy 10,000 additional Model As for a price of $80 per unit. If Gage accepts the customer's offer, how much will its profits increase or decrease?

	Accept Order	Reject Order	Net Income Increase/ (Decrease)

Answer 1

a.

Traceable fixed Expenses of

Model A = $ 16 per unit * 100,000 units = $ 1,600,000

Model B = $ 18 per unit * 100,000 Units = $ 1,800,000

Total = 1,600,000 + 1,800,000 = $ 3,400,000

b.

Common fixed Expenses of

Model A = $ 15 per unit * 100,000 units = $ 1,500,000

Model B = $ 10 per unit * 100,000 Units = $ 1,000,000

Total = 1,500,000 + 1,000,000 = $ 2,500,000

c.

Variable COst of Model A = Direct materials +  Direct Labour + Variable Mfg Cost + Variable Selling Expenses

= 30 + 20+ 7 + 12 = $ 69 per unit

Increase in income = 10000 units ($ 80 - $ 69) = 10000 * $ 11 = $ 110,000

Should Accept the order