Cane Company manufactures two products called Alpha and Beta that sell for $215
ID: 2480663 • Letter: C
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:
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 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?
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 $ 154Explanation / Answer
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 CALCULATION OF PROFIT IN NORMAL CONDITION Alpha (96000 UNITS) Beta(76000 UNITS) Cost p.u Total Cost Cost p.u Total Cost Direct materials 42 4032000 21 1596000 Direct labor 35 3360000 28 2128000 Variable manufacturing overhead 23 2208000 21 1596000 Traceable fixed manufacturing overhead 31 2976000 34 2584000 Variable selling expenses 28 2688000 24 1824000 Common fixed expenses 31 2976000 26 1976000 TOTAL COST 190 18240000 154 11704000 SALES 215 20640000 160 12160000 PROFIT [COST-SALES] 2400000 456000 TOTAL PROFIT 2856000 IF PRODUCTIONS OF BETA DISCONTINUES AND INCREASE IN SALEOF ALPHA BY 16000 UNITS STATEMENT SHOWING PROFIT OF ADDITIONAL 16000 UNITS Cost p.u Total Cost Direct materials 42 672000 Direct labor 35 560000 Variable manufacturing overhead 23 368000 Traceable fixed manufacturing overhead 31 496000 Variable selling expenses 28 448000 Common fixed expenses 31 496000 TOTAL COST 190 3040000 SALES 215 3440000 PROFIT from additional unis [COST-SALES] -400000 PROFIT FROM ORIGINAL 96000 ALPHA 2400000 TOTAL PROFIT 2000000 PROFIT IF BETA NOT DISCONTINUED 2856000 DECREASE IN PROFIT [2856000-2000000] 856000
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