Cane Company manufactures two products called Alpha and Beta that sell for $155
ID: 2485757 • Letter: C
Question
Cane Company manufactures two products called Alpha and Beta that sell for $155 and $115, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 110,000 units of each product. Its unit costs for each product at this level of activity are given below:
Alpha
Beta
Direct materials
$
24
$
12
Direct labor
23
26
Variable manufacturing overhead
22
12
Traceable fixed manufacturing overhead
23
25
Variable selling expenses
19
15
Common fixed expenses
22
17
Total cost per unit
$
133
$
107
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.
6. Assume that Cane normally produces and sells 97,000 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 67,000 Betas and 87,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 11,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?
9. Assume that Cane expects to produce and sell 87,000 Alphas during the current year. A supplier has offered to manufacture and deliver 87,000 Alphas to Cane for a price of $108 per unit. If Cane buys 87,000 units from the supplier instead of making those units, how much will profits increase or decrease?
10. Assume that Cane expects to produce and sell 57,000 Alphas during the current year. A supplier has offered to manufacture and deliver 57,000 Alphas to Cane for a price of $108 per unit. If Cane buys 57,000 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 $155 and $115, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 110,000 units of each product. Its unit costs for each product at this level of activity are given below:
Explanation / Answer
6. Contribution margin per unit from Beta: Selling price per unit - Variable cost per unit = $ ( 115 - 65) = $ 50
Total contribution margin = 97,000 x $ 50 = $ 4,850,000
If the Beta line is discontinued, traceable manufacturing fixed overhead costs that would be saved = $ 25 x 110,000 = $ 2,750,000
Hence, if Beta is discontinued, the decrease in profit would be $ 4,850,000 - $ 2,750,000 = $ 2,100,000
8. Contribution from Alpha = Selling price per unit - Variable costs per unit = $ 155 - $ 88 = $ 67
Total contribution from the additional sales of Alpha = 11,000 x $ 67 = $ 737,000
Loss of contribution from on discontinuing Beta = 67,000 x $ 50 = $ 3,350,000
Saving in traceable fixed manufacturing overhead of beta = $ 2,750,000
Increase in profit on discontinuing Beta = $ ( 737,000 + 2,750,000 - 3,350,000) = $ 137,000
9. Cost of purchasing Alphas= 87,000 x $ 108 = $ 9,396,000
Relevant cost of making Alphas = Total variable cost + Avoidable fixed cost = (87,000 x $ 69 ) + $ 2,530,000 = $ 8,533,000
If Cane buys from the supplier, profits would decrease by $ ( 9,396,000 - 8,533,000) = $ 863,000
10. Relevant cost of making Alphas = 57,000 x $ 69 + $ 2,530,000 = $ 6,463,000
Cost of purchasing from outside supplier = 57,000 x $ 108 = $ 6,156,000
If Cane opts for buying Alphas from outside supplier, profits would increase by $ ( 6,463,000 - 6,156,000 ) = $ 307,000
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