Cane Company manufactures two products called Alpha and Beta that sell for $225
ID: 2520974 • Letter: C
Question
Cane Company manufactures two products called Alpha and Beta that sell for $225 and $175, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 130,000 units of each product. Its average cost per unit 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 unavoidable and have been allocated to products based on sales dollars.
5. Assume that Cane expects to produce and sell 114,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 29,000 additional Alphas for a price of $156 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 13,000 units.
a. What is the financial advantage (disadvantage) of accepting the new customer’s order?
6. Assume that Cane normally produces and sells 109,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?
7. Assume that Cane normally produces and sells 59,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?
Alpha Beta Direct materials $ 42 $ 24 Direct labor 42 32 Variable manufacturing overhead 26 24 Traceable fixed manufacturing overhead 34 37 Variable selling expenses 31 27 Common fixed expenses 34 29 Total cost per unit $ 209 $ 173Explanation / Answer
Answer 5. Statement of Incremental Profit If order is Accepted of Alpha - 29,000 Units Particulars Amount Increase in Sales (29,000 Units X $156) 4,524,000 Less: Increase in Costs Variable Cost Direct Material (29,000 Units X $42) (1,218,000) Direct Labour (29,000 Units X $42) (1,218,000) Variable MOH (29,000 Units X $26) (754,000) Variable Selling Exp. (29,000 Units X $31) (899,000) Loss of Contribution to Normal Customers -13,000 X $84 (1,092,000) (5,181,000) Incremental Profit / (Loss) (657,000) Contrbution per Unit = $225 - ($42+$42+$26+$31) = $84 Net Income will decrease by $657,000, if order is accepted. Answer 6. Statement of Incremental Profit If Beta is Discontinued - 109,000 Units Particulars Amount Incremental Revenue - savings in Costs Direct Material (109,000 Units X $24) 2,616,000 Direct Labour (109,000 Units X $32) 3,488,000 Variable MOH (109,000 Units X $24) 2,616,000 Variable Selling Exp. (109,000 Units X $27) 2,943,000 Traceable Fixed Manf. Costs - 130,000 Units X $37 4,810,000 16,473,000 Incremental Cost Loss of Sales Revenue - 109,000 Units X $175 (19,075,000) Incremental Profit / (Loss) (2,602,000) Answer 7. Statement of Incremental Profit If Beta is Discontinued - 59,000 Units Particulars Amount Incremental Revenue - savings in Costs Direct Material (59,000 Units X $24) 1,416,000 Direct Labour (59,000 Units X $32) 1,888,000 Variable MOH (59,000 Units X $24) 1,416,000 Variable Selling Exp. (59,000 Units X $27) 1,593,000 Traceable Fixed Manf. Costs - 130,000 Units X $37 4,810,000 11,123,000 Incremental Cost Loss of Sales Revenue - 59,000 Units X $175 (10,325,000) Incremental Profit / (Loss) 798,000
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