Cane Company manufactures two products called Alpha and Beta that sell for $140

Question

Cane Company manufactures two products called Alpha and Beta that sell for $140 and $100, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 106,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

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.

6a. Assume that Cane normally produces and sells 94,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

6b. Assume that Cane normally produces and sells 44,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

6c. Assume that Cane normally produces and sells 64,000 Betas and 84,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 19,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

6d. Assume that Cane expects to produce and sell 84,000 Alphas during the current year. A supplier has offered to manufacture and deliver 84,000 Alphas to Cane for a price of $96 per unit. What is the financial advantage (disadvantage) of buying 84,000 units from the supplier instead of making those units?

6e. Assume that Cane expects to produce and sell 54,000 Alphas during the current year. A supplier has offered to manufacture and deliver 54,000 Alphas to Cane for a price of $96 per unit. What is the financial advantage (disadvantage) of buying 54,000 units from the supplier instead of making those units?

Alpha Beta Direct materials $ 32 $ 16 Direct labor 24 19 Variable manufacturing overhead 10 9 Traceable fixed manufacturing overhead 20 22 Variable selling expenses 16 12 Common fixed expenses 19 14 Total cost per unit $ 121 $ 92

Explanation / Answer

Solution 6a:

Net financial disadvantage of discontinuing Beta = $1,804,000

Solution 6b:

Net financial advantage of discontinuing Beta = $396,000

Solution 6c:

Net financial advantage = $618,000

Solution 6d:

Net financial disadvantage of buying alpha = $400,000

Solution 6e:

Net financial advantage of buying alpha = $500,000

Differential Analysis - Sale Beta (94000 units) (alt 1) or Discontinue Beta (Alt2) Particulars Sale Beta (94000 Units)
(Alt 1) Discontinue Beta (Alt 2) Differential effect on income (Alt 2) Details Amount Details Amount Revenue 94000*$100 $9,400,000.00 $0.00 -$9,400,000.00 Costs: Direct Material 94000*$16 $1,504,000.00 $0.00 -$1,504,000.00 Direct Labor 94000*$19 $1,786,000.00 $0.00 -$1,786,000.00 Variable manufacturing Overhead 94000*$9 $846,000.00 $0.00 -$846,000.00 Variable Selling Expenses 94000*$12 $1,128,000.00 $0.00 -$1,128,000.00 Traceable Fixed manufacturing overhead 106000*$22 $2,332,000.00 $0.00 -$2,332,000.00 Common fixed expenses 106000*$14 $1,484,000.00 106000*$14 $1,484,000.00 $0.00 Income / (Loss) $320,000.00 -$1,484,000.00 -$1,804,000.00

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