Cane Company manufactures two products called Alpha and Beta that sell for $215

Question

Cane Company manufactures two products called Alpha and Beta that sell for $215 and $160, respectively. Each product uses only one type of raw material that costs $7 per pound. The company has the capacity to annually produce 125,000 units of each product. Its unit costs for each product at this level of activity are given below

  

1. What is the total amount of traceable fixed manufacturing overhead for the Alpha product line and for the Beta product line?

2.

Assume that Cane expects to produce and sell 106,000 Betas during the current year. One of Cane’s sales representatives has found a new customer that is willing to buy 4,000 additional Betas for a price of $74 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease?

5.

Assume that Cane expects to produce and sell 111,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 26,000 additional Alphas for a price of $144 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 12,000 units.

Calculate the incremental net operating income if the order is accepted? (Loss amount should be indicated with a minus sign.)

6. Assume that Cane normally produces and sells 106,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

7.

Assume that Cane normally produces and sells 56,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

8.

Assume that Cane normally produces and sells 76,000 Betas and 96,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 16,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?

Assume that Cane expects to produce and sell 96,000 Alphas during the current year. A supplier has offered to manufacture and deliver 96,000 Alphas to Cane for a price of $144 per unit. If Cane buys 96,000 units from the supplier instead of making those units, how much will profits increase or decrease?

Alpha Beta   Direct materials $ 42 $ 21   Direct labor 35 28   Variable manufacturing overhead 23 21   Traceable fixed manufacturing overhead 31 34   Variable selling expenses 28 24   Common fixed expenses 31 26 Total cost per unit $ 190 $ 154

  

Explanation / Answer

1.

2.

4.

Profit would be increased as shown below-

*Common fixed expenses will not be considered as sunk cost since it is not working at full capacity.

5

Profit would be Decreased as shown below

A B Units        125,000        125,000 Traceable fixed manufacturing overhead                  31                  34     3,875,000     4,250,000

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