Cane Company manufactures two products called Alpha and Beta that sell for $195

Question

Cane Company manufactures two products called Alpha and Beta that sell for $195 and $150, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 123,000 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.

8. Assume that Cane normally produces and sells 75,000 Betas and 95,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 15,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?

9. Assume that Cane expects to produce and sell 95,000 Alphas during the current year. A supplier has offered to manufacture and deliver 95,000 Alphas to Cane for a price of $140 per unit. If Cane buys 95,000 units from the supplier instead of making those units, how much will profits increase or decrease?

10. Assume that Cane expects to produce and sell 70,000 Alphas during the current year. A supplier has offered to manufacture and deliver 70,000 Alphas to Cane for a price of $140 per unit. If Cane buys 70,000 units from the supplier instead of making those units, how much will profits increase or decrease?

11. How many pounds of raw material are needed to make one unit of Alpha and one unit of Beta?

12. What contribution margin per pound of raw material is earned by Alpha and Beta?

13. Assume that Cane’s customers would buy a maximum of 95,000 units of Alpha and 75,000 units of Beta. Also assume that the company’s raw material available for production is limited to 245,000 pounds. How many units of each product should Cane produce to maximize its profits?

14. Assume that Cane’s customers would buy a maximum of 95,000 units of Alpha and 75,000 units of Beta. Also assume that the company’s raw material available for production is limited to 245,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?

15. Assume that Cane’s customers would buy a maximum of 95,000 units of Alpha and 75,000 units of Beta. Also assume that the company’s raw material available for production is limited to 245,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials?

Alpha Beta   Direct materials $ 40 $ 15   Direct labor 34 28   Variable manufacturing overhead 22 20   Traceable fixed manufacturing overhead 30 33   Variable selling expenses 27 23   Common fixed expenses 30 25   Total cost per unit $ 183 $ 144

Explanation / Answer

Since, there are multiple parts to the question, the first five have been answered (from 8 to 12).

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Part 8)

The impact of dropping Beta product has been calculated as follows:

Notes:

Contribution Margin Per Unit (Beta) = 150 (Selling Price) - 15 (Direct Material) - 28 (Direct Labor) - 20 (Variable Manufacturing Overhead) - 23 (Variable Selling Expenses) = $64 per unit

Contribution Margin Per Unit (Alpha) = 195 (Selling Price) - 40 (Direct Material) - 34 (Direct Labor) - 22 (Variable Manufacturing Overhead) - 27 (Variable Selling Expenses) = $72 per unit

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Part 9)

The impact of buying Alpha from outside supplier has been calculated as follows:

The profits would decrease by $490,000 is Alpha is purchased from outside supplier.

__________

Part 10)

The impact of buying Alpha from outside supplier has been calculated as follows:

The profits would increase by $610,000 is Alpha is purchased from outside supplier.

__________

Part 11)

The pounds of raw material have been computed as follows:

__________

Part 12)

The contribution margin per pound of raw material has been computed as follows:

Loss of Contribution Margin if Beta is Dropped (75,000*64) -$4,800,000 Traceable Fixed Manufacturing Overhead (123,000*33) $4,059,000 Incremental Contribution Margin from Additional Alpha Sales (15,000*72) $1,080,000 Increase in Net Operating Income if Beta is Dropped $339,000

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