Cane Company manufactures two products called Alpha and Beta that sell for $130
ID: 2530817 • 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 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. Questions: (Please show all work/steps)
6. Assume that Cane normally produces and sells 92,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?
7. Assume that Cane normally produces and sells 42,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?
8. 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. What is the financial advantage (disadvantage) of discontinuing the Beta product line?
9. 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. What is the financial advantage (disadvantage) of buying 82,000 units from the supplier instead of making those units?
10. Assume that Cane expects to produce and sell 52,000 Alphas during the current year. A supplier has offered to manufacture and deliver 52,000 Alphas to Cane for a price of $88 per unit. What is the financial advantage (disadvantage) of buying 52,000 units from the supplier instead of making those units?
13. Assume that Cane’s customers would buy a maximum of 82,000 units of Alpha and 62,000 units of Beta. Also assume that the company’s raw material available for production is limited to 162,000 pounds. How many units of each product should Cane produce to maximize its profits?
14. Assume that Cane’s customers would buy a maximum of 82,000 units of Alpha and 62,000 units of Beta. Also assume that the company’s raw material available for production is limited to 162,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?
Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit Alpha Beta $10 21 7 20 10 12 $ 25 17 18 14 17 $113 $ 80Explanation / Answer
Solution 6:
Let’s compute the advantage/ disadvantage of producing Beta:
Particulars
Per Unit
Total
Revenue lost
90
8,280,000
Less: Direct Material Cost saved
10
920,000
Less: Direct labor Cost saved
21
1,932,000
Less: Variable Manufacturing Overhead saved
7
644,000
Less: Traceable Fixed Manufacturing overhead saved
2,040,000
Less: Variable Selling expenses saved
10
920,000
Net (Advantage)/ Disadvantage
1,824,000
Company will face disadvantage of $1,824,000.
Solution 7: Advantage of $276,000
Particulars
Per Unit
Total
Revenue lost
90
3,780,000
Less: Direct Material Cost saved
10
420,000
Less: Direct labor Cost saved
21
882,000
Less: Variable Manufacturing Overhead saved
7
294,000
Less: Traceable Fixed manufacturing overhead saved
2,040,000
Less: Variable Selling expenses saved
10
420,000
Net (Advantage)/ Disadvantage
-276,000
Solution 8: Disadvantage of $520,000
Let’s compare the additional contribution made by 17,000 units of Alpha with the profit lost due to discontinuance of 82,000 Beta.
Profit lost due to discontinuance of beta:
Particulars
Per Unit
Total
Revenue lost
90
7,380,000
Less: Direct Material Cost saved
10
820,000
Less: Direct labor Cost saved
21
1,722,000
Less: Variable Manufactuing Overhead saved
7
574,000
Less: Traceable Fixed manufactuing overhead saved
2,040,000
Less: Variable Selling expenses saved
10
820,000
Net (Advantage)/ Disadvantage
1,404,000
Additional Contribution for 17,000 units of Alpha: 17,000 * 52= 884,000
Alpha
Selling Price
130
Less: Variable cost
Direct Material
25
Direct Labor
22
Variable manufacturing Overhead
17
Variable Selling expenses
14
Total Variable cost
78
Net Contribution per unit
52
Net disadvantage: -1,404,000 + 884,000= $520,000
Solution 9: Current variable cost per unit of Alpha as computed above is $78. If Company starts buying from outside vendor, it will save traceable fixed manufacturing overhead as well. Traceable fixed manufacturing overhead (in total) are 102,000 * 18= $1,836,000.
Hence calculation will be as follows:
Additional variable cost per unit to be incurred (88 – 78) * 82,000= $820,000
Saving in traceable fixed manufacturing Overhead= $1,836,000
Net Saving= $1,836,000 - $820,000 = $1,016,000
Solution 13:
Since the company’s raw material available for production is limited to 162,000 pounds, it will prioritize that product which is having higher contribution per pound of raw material.
Alpha
Beta
Net Contribution per unit
52
42
No. of pounds of raw material consumed
5
2
Contribution per pound of raw material
10.4
21
Since Beta is having highest contribution per pound of raw material, company will produce maximum units of beta. Since Beta is having demand of 62,000 units, it will be requiring 124,000 pounds (62,000 *2). Company can easily produce 62,000 units of Beta.
Left over pounds of raw material is 18,000 pounds (162,000 – 124,000). From 38,000 pound of raw material, 7,600 Alpha can be produced (38,000 / 5)
Solution 14: $2,999,200
Maximum contribution will be earned when 62,000 units of Beta will be sold and 7,600 Alpha will be sold (Solution 13)
Alpha
Beta
No. of units
7,600
62,000
Contribution per unit
52
42
Contribution per pound of raw material
395,200
2,604,000
Total maximum Contribution would be 2,999,200
Particulars
Per Unit
Total
Revenue lost
90
8,280,000
Less: Direct Material Cost saved
10
920,000
Less: Direct labor Cost saved
21
1,932,000
Less: Variable Manufacturing Overhead saved
7
644,000
Less: Traceable Fixed Manufacturing overhead saved
2,040,000
Less: Variable Selling expenses saved
10
920,000
Net (Advantage)/ Disadvantage
1,824,000
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