Cane Company manufactures two products called Alpha and Beta that sell for $130
ID: 2462561 • Letter: C
Question
Cane Company manufactures two products called Alpha and Beta that sell for $130 and $90, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 102,000 units of each product. Its unit costs for each product at this level of activity are given below:
1)
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.
Assume that Cane normally produces and sells 62,000 Betas and 82,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 17,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?
Cane Company manufactures two products called Alpha and Beta that sell for $130 and $90, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 102,000 units of each product. Its unit costs for each product at this level of activity are given below:
Explanation / Answer
The increase/decrease in profits is calculated with the use of following table:
If Cane discontinues the Beta product line, the profits would increase by $320,000.
Notes:
Contribution Per Unit of Alpha and Beta is calculated as follows:
1) Alpha = Selling Price - Direct Material - Direct Labor - Variable Overhead - Variable Selling Expenses = 130 - 25 - 22 - 17 - 14 = $52 per unit
2) Beta = Selling Price - Direct Material - Direct Labor - Variable Overhead - Variable Selling Expenses = 90 - 10 - 21 - 7 - 10 = $42 per unit
Loss of Contribution Margin if Beta is Dropped [62,000(90 - 10 - 21 - 7 - 10)] -2,604,000 Traceable Fixed Manufacturing Overhead (102,000*20) 2,040,000 Increase in Contribution Margin of Alpha [17,000*(130 - 25 - 22 - 17 - 14)] 884,000 Increase in Profits $320,000Related Questions
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