Question

Pole Company manufactures two products called Tap and Bounce that sell for $360 and $240, respectively. Each product uses only one type of raw material that costs $18 per pound. The company has the capacity to annually produce 300,000 units of each product. Its unit costs for each product at this level of activity are given below:

Tap      Bounce

Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . . .     $ 90     $36

Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    60        45

Variable manufacturing overhead. . . . . . . . . . . . .     21        15

Traceable fixed manufacturing overhead. . . . . . .      48        54

Variable selling expenses. . . . . . . . . . . . . . . . . . .      36        24

Common fixed expenses. . . . . . . . . . . . . . . . . . . .     45        30

Total cost per unit. . . . . . . . . . . . . . . . . . . . . . . . . .    $300    $204

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.

Required:

Assume that Pole expects to produce and sell 240,000 Taps during the current year. One of Pole’s sales representatives has found a new customer that is willing to buy 30,000 additional Taps for a price of $240 per unit. If Pole accepts the customer’s offer, how much will its profits increase or decrease?

Please give detailed explanation or step by step process on how to achieve this answer

Answer 1

Profit and Loss
	UOM		Tap
Sales Price per unit	$/unit		240
Costs of production per unit	$/unit
Direct Material	$/unit	90
Direct Labour	$/unit	60
Variable manufacturing Overhead	$/unit	21
variable selling expenses	$/unit	36
Common Fixed expenses	$/unit	30
Total Costs per unit	$/unit		237
Profit per unit	$/unit		3
Quantity Expected to be sold units			30,000
Total Profit from selling additional units.	$		90,000

Common Fixed expenses for additional 30,000 units to be sold at $240= 45*240/360 = $ 30/ unit.

The company profits will increase by $90,000 if it is able to avoid the traceable Fixed overhead, else its profit will decrease by $ 1.35 million on accepting the offer to sale additional 30,000 Taps