[The following information applies to the questions displayed below. Cane Compan
ID: 2466928 • Letter: #
Question
[The following information applies to the questions displayed below. Cane Company manufactures two products called Alpha and Beta that sell for $150 and $105, respectively Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 107,000 units of each product. Its unit costs for each product at this level of activity are given below: Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Alpha Beta $30 $10 20 10 23 13 15 25 12 21 17 20 Total cost per unit $125 $ 91 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.Explanation / Answer
Solution:
6)
Profit decreased by $2,479,000
If beta continues, company’s profit is $874,000
If beta continues, company will bear loss of $1,605,000
It means profit will be decreased by ($1,605,000 + $874,000) = $2,479,000
Calculation of Profitability if Beta Continues or if discontinue
Selling Price Per Unit
$105
Total Variable Cost Per Unit (10+20+10+13)
($53)
Contribution Margin Per Unit
$52
Total Contribution margin for 95,000 Units
$4,940,000
Beta Continue
Beta Discontinue
Total Contribution Margin
$4,940,000
$0
Fixed Expenses
Traceable Fixed Manufacturing OH ($23x107,000)
$2,461,000
$0
Common Fixed Expenses (15*107,000)
$1,605,000
$1,605,000
Total Fixed Expenses
$4,066,000
$1,605,000
Operating Profit (Contribution - fixed expenses)
$874,000
($1,605,000)
Note --- Common Fixed Expenses will remain same in totality irrespective of level of output.
7)
The profit increased by $121,000
Because if the beta is continued, company will incur loss of $1,726,000
And if the beta is discontinued, the loss will be reduced to $1,605,000.
It means profit will be increase by $121,000 (-$1,726,000 + $121,000 = $1.605.000)
Selling Price Per Unit
$105
Total Variable Cost Per Unit (10+20+10+13)
($53)
Contribution Margin Per Unit
$52
Total Contribution margin for 45,000 Units
$2,340,000
Beta Continue
Beta Discontinue
Total Contribution margin for 45,000 Units
$2,340,000
$0
Fixed Expenses
Traceable Fixed Manufacturing OH ($23x107,000)
$2,461,000
$0
Common Fixed Expenses (15*107,000)
$1,605,000
$1,605,000
Total Fixed Expenses
$4,066,000
$1,605,000
Operating Profit (Contribution - fixed expenses)
($1,726,000)
($1,605,000)
8)
Profit increased by $401,000
Explanation:
In existing condition both product selling, company will earn an overall profit = $537,000
In New Situation where Beta Discontinue, company will earn overall profit = $938,000
It means if beta is discontinued profit will be increase by $401,000 ($938000 - $537,000)
Existing Condition
New Situation
Alpha
Beta
Total
Alpha
Beta Discontinue
Total
Selling Price Per Unit
$150
$105
Total Variable Cost Per Unit
($84)
($53)
Contribution Margin Per Unit
$66
$52
$66
Sales Units
85000
65000
105000
Total Contribution Margin
$5,610,000
$3,380,000
$6,930,000
Profit
Profit
Alpha
Beta
Alpha
Beta Discontinue
Total Contribution Margin
$5,610,000
$3,380,000
$6,930,000
$0
Fixed Expenses
Traceable Fixed Manufacturing OH
$2,247,000
$2,461,000
$2,247,000
$0
Common Fixed Expenses
$2,140,000
$1,605,000
$2,140,000
$1,605,000
Total Fixed Expenses
$4,387,000
$4,066,000
$4,387,000
$1,605,000
Operating Profit (Contribution - fixed expenses)
$1,223,000
($686,000)
$537,000
$2,543,000
($1,605,000)
$938,000
9)
Profit decreased by $558,000
If company produces alpha, profit is $1,223,000
If company purchase alpha from outside, profit is $665,000
It means if company buys alpha instead of making profit will be decreased by $558,000 ($1,223,000 - $665,000)
Existing Condition
New Situation (Alpha Purchased from Outside)
Alpha
Alpha
Selling Price Per Unit
$150
$150
Total Variable Cost Per Unit
($84)
Purchase Price Per Unit
($100)
Variable Selling Expense Per Unit
($17)
Contribution Margin Per Unit
$66
$33
Sales Units
85000
85000
Total Contribution Margin
$5,610,000
$2,805,000
Fixed Expenses
Traceable Fixed Manufacturing OH
$2,247,000
$0
Common Fixed Expenses
$2,140,000
$2,140,000
Total Fixed Expenses
$4,387,000
$2,140,000
Operating Profit (Contribution - fixed expenses)
$1,223,000
$665,000
Selling Price Per Unit
$105
Total Variable Cost Per Unit (10+20+10+13)
($53)
Contribution Margin Per Unit
$52
Total Contribution margin for 95,000 Units
$4,940,000
Beta Continue
Beta Discontinue
Total Contribution Margin
$4,940,000
$0
Fixed Expenses
Traceable Fixed Manufacturing OH ($23x107,000)
$2,461,000
$0
Common Fixed Expenses (15*107,000)
$1,605,000
$1,605,000
Total Fixed Expenses
$4,066,000
$1,605,000
Operating Profit (Contribution - fixed expenses)
$874,000
($1,605,000)
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