Chapter 12 Problem 3 Ace Company manufactures two products called A and B that s

Question

Chapter 12 Problem 3 Ace Company manufactures two products called A and B that sell for $100 and $60 respectively. Each product uses only one type of raw material that cost $5 per pound. Ace has the capacity to annually produce 100,000 units of each product. The unit cost for each product at this level of capacity is given below: 10 Direct Material Direct Labor Variable Manufacturing Overhead10 Traceable Fixed Overhead Variable Selling expenses Common Fixed Overhead 25 15 15 10 Total Cost per Unit $90.62 $49.38 Aceconsiders its tracea ble fixed manufacturing overhead to be avoidable, but its common fixed expenses are deemed unavoida ble. The common fixed expenses have been allocated to products based on sales dollars. Answer each question independently unless instructed otherwise. Use an excel format to answer each question. The economy is in a slump; unit salesaredown. Cane forecasts unit sales for 50,000 alphas and 25,000 Betas Cane is contemplating closing the Beta line 1. A. Assume that the selling price of beta units is reduced to $50 and fixed costs traceable to the beta line are $550,000. If the beta line is discontinued what will be the product line segment margin? What will be the net operating income for Cane? Note: when computing the Product Line Segment Margin, common fixed expenses are not allocated to the product lines; use exhibit 12-4, page S42 for an example to compute the product line segment margin. 2. Refer to 1 above. If the beta line is discontinued alpha unit sales will be reduced 5%, what will be the product line segment margin if the beta line is discontinued; what will be the net operating income?

Explanation / Answer

A. If units sales are expected as 50,000 for Alpha and 25,000 for Beta: 1. If selling price is reduced to $50 per unit and fixed cost for Beta is $550,000. the Beta line segment margin if Beta is discontinued Beta segment margin: Selling price $50 Less: Direct material $                 10 Direct labor $                 10 Variable manufacturing overhead $                   5 Variable selling expenses $                   5 Contribution margin $                 20 Contribution margin for 25,000 units $        500,000 Less: Traceable fixed cost $      (550,000) Net loss $        (50,000) The product segmnet margin of alpha and net operating income for Cane is calculated as under: Alpha Selling price $100 Less: Direct material $               (25) Direct labor $               (15) Variable manufacturing overhead $               (10) Variable selling expenses $               (10) Contribution margin $                 40 Contribution margin for 50,000 units $     2,000,000 Less: Traceable fixed cost $   (1,500,000) (100,000 units @ $15 per unit) Product line segment margin $        500,000 Less; Common fixed cost $   (2,500,000) (25*100,000) Net operating loss of Cane $   (2,000,000) 2 If beta line is discontinued, Alpha sales units reduce by 5%. The product line segment margin would be as under: Alpha Units sold (50,000 less 5%)              47,500 Selling price $100 Less: Direct material $               (25) Direct labor $               (15) Variable manufacturing overhead $               (10) Variable selling expenses $               (10) Contribution margin $                 40 Contribution margin(47,500 units @ $40 per unit) $     1,900,000 Less: Traceable fixed cost $   (1,500,000) Product line segment margin $        400,000 Net operating income of Cane would be as under: Product line segment margin $        400,000 Less: Common fixed cost $   (2,500,000) Net operating loss of Cane $   (2,100,000) B. If the raw material is in constraint then the product having higher contribution margin will be produced and sold: Contribution margin for Alpha and Beta Alpha Beta Selling price 120 52 Less: Direct material $               (25) $                 (10) Direct labor $               (15) $                 (10) Variable manufacturing overhead $               (10) $                   (5) Variable selling expenses $               (10) $                   (5) Contribution margin $                 60 $                   22 No, of pounds required per unit (25/5); (10/5) 5 2 Contribution margin per pound $                 12 $                   11 The contirbution margin per pound of Alpha product is higher than beta therefore the company should produce Alpha product for more profit. raw material available            500,000 pounds For production of 80,000 units of Alpha raw material required (80,000*5)            400,000 pounds Raw material left            100,000 pounds Pounds required for production of Beta                       2 pounds No. of units of Beta can be produced              50,000 pounds (100,000/2)=50,000 units Therefore the Cane should produce maximum units of Alpha of 80,000 units and from left over raw material should be used for production of Beta of 50,000 units. 2 The product line segment margin calculated as under: Units produced and sold 80,000 50,000 Alpha Beta Selling price 120 52 Less: Direct material $               (25) $                 (10) Direct labor $               (15) $                 (10) Variable manufacturing overhead $               (10) $                   (5) Variable selling expenses $               (10) $                   (5) Contribution margin $                 60 $                   22 Total contribution margin(units*contribution marginper unit) $     4,800,000 $       1,100,000 Less: Traceable fixed cost $   (1,500,000) $     (1,000,000) Product line segment margin $     3,300,000 $          100,000 The net operating income of Cane would be as under: Alpha Beta Total Product line segment margin $     3,300,000 $          100,000 $                            3,400,000 Less: common fixed cost $                          (2,500,000) Net operating income $                               900,000

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