Cane Company manufactures two products called Alpha and Beta that sell for $130
ID: 2481276 • 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. Assume that Cane expects to produce and sell 97,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 12,000 additional Alphas for a price of $88 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 7,000 units
Calculate the incremental net operating income if the order is accepted.
2. Assume that Cane normally produces and sells 92,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?
3. Assume that Cane normally produces and sells 42,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?
4.
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?
5.
Assume that Cane expects to produce and sell 82,000 Alphas during the current year. A supplier has offered to manufacture and deliver 82,000 Alphas to Cane for a price of $88 per unit. If Cane buys 82,000 units from the supplier instead of making those units, how much will 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
Total operating earnings if 102000 units EACH of Alfa & Beta is produced & sold would be $2,550,000 Calculations as per Table A
(1) If Export Order is accepted total operating earning would be $4,542,000 . (Calculations as per Table B). Inreamental Cash Flow = $4,542,000 - $2,550,000 = $1,992,000.
(3) Assume that Cane normally produces and sells 92,000 Betas per year. If Cane discontinues the Beta product line, $600,000 profits will decrease. (Related calculation are given in Table C)
(3) Assume that Cane normally produces and sells 42,000 Betas per year. If Cane discontinues the Beta product line, $3,900,000 profits will increase. Actually loss of Beta would be discontinued.(For more details refer Table D)
(4) 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?
Ans: Loss by Beta product of $660,000 will be discontinues. Hence it will be added in total profit as &660,000. Alfa product contribution per unit is $52. Hence profit from additional 17,000 units would be $884,000 (=17000 x $52). Here fixed cost element do not play the role. As such net impact would be $1,544,000. Calculations as per Table E.
(5)Assume that Cane expects to produce and sell 82,000 Alphas during the current year. A supplier has offered to manufacture and deliver 82,000 Alphas to Cane for a price of $88 per unit. If Cane buys 82,000 units from the supplier instead of making those units, how much will profits increase or decrease?
Ans: Present per unit cost of Alfa at 82,000 unit level = (82000 x VC $78 ) +(FC of $3,150,000 ) / 82,000 = ($6,396,000+3,150,000)/ 82,000 = $116.42 Hence saving for getting 82,000 units of Alfa from supplier = ( $116.42 - $88) x 82,000 = $2,330,440.
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TABLE- A Alfa 102,000 units Beta 102,000 units Particulars Amt ($) Amount ($) Amt. ($) Amount ($) revenue a b c d e f g h = e + g i)Sales in unit 1 90,000 1 102,000 ii)Sales price per unit 130 130 90 90 - A Sales value ( I x ii) 130 11,700,000 90 9,180,000 20,880,000 B Variabble cost - a)Material 25.00 10.00 - b)Direct Labour 22.00 21.00 - c)Variable Manf. Overhead 17.00 7.00 - d)Variable Selling Expenses 14.00 10.00 - e) Total Variable Expenses (a+b+c+d)) 78.00 7,020,000 48.00 4,896,000 11,916,000 - C Contribution (A-B) (A-B) 52.00 4,680,000 42.00 4,284,000 8,964,000 - D Fixed Cost - a) Traceable Fixed Manuf. O/h. 1,620,000 2,040,000 b)Fixed Seling Expenses 1,530,000 1,224,000 Total Fixed Overheads 3,150,000 3,264,000 6,414,000 - E Operation Income (C-D) (C-D) 1,530,000 1,020,000 2,550,000Related Questions
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