Cane Company manufactures two products called Alpha and Beta that sell for $180

Question

Cane Company manufactures two products called Alpha and Beta that sell for $180 and $145, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 118,000 units of each product. Its unit costs 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 deemed unavoidable and have been allocated to products based on sales dollars.

1. Assume that Cane normally produces and sells 102,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

2. Assume that Cane normally produces and sells 52,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

3. Assume that Cane expects to produce and sell 62,000 Alphas during the current year. A supplier has offered to manufacture and deliver 62,000 Alphas to Cane for a price of $128 per unit. If Cane buys 62,000 units from the supplier instead of making those units, how much will profits increase or decrease?

Cane Company manufactures two products called Alpha and Beta that sell for $180 and $145, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 118,000 units of each product. Its unit costs for each product at this level of activity are given below:

Explanation / Answer

1. Profits decrease by $2274000

2. Profits increase by $576000

3. Profits increase by $644000

Note: The selling price and variable selling expenses will not change with the alternatives and hence are irrelevant. Common fixed expenses are unavoidable and hence irrelevant as they too will not change with the alternatives.

Beta
(102000 units) Per unit $ Total $ Sales 145 14790000 Less: Variable costs Direct materials 24 2448000 Direct labor 27 2754000 Manufacturing overhead 17 1734000 Selling expenses 20 2040000 Total variable costs 88 8976000 Contribution margin lost 57 5814000 Less: Savings in traceable fixed manufacturing overhead 30 3540000 (118000 x $30) Net (increase)/decrease in profits $ 2274000

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