Cane Company manufactures two products called Alpha and Beta that sell for $130
ID: 2530915 • 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
Computation of the net income per unit of products alpha & beta.We have,
(6) Computation of the financial advantage(or disadvantage) if product beta discontinue.We have,
Current production and sell product beta = 92,000 units
Net profit per unit of product beta = $ 10
Total profit if continue beta product = 92,000 x 10 = $ 920,000
If we discontinue product beta.Then, unavoidable common fixed expenses are transferred to product alpha.
Common fixed expenses per unit for product beta = $ 12
Total common fixed expenses for 92,000 unit = 92,000 x 12 = $ 1,104,000
Financial disadvantage if discontinue product beta = 1,104,000 - 920,000 = $ 184,000
(8) Computation of the financial advantage(or disadvantage) if product beta discontinue.We have,
Current production and sell product beta = 42,000 units
Net profit per unit of product beta = $ 10
Total profit if continue beta product = 42,000 x 10 = $ 420,000
If we discontinue product beta.Then, unavoidable common fixed expenses are transferred to product alpha.
Common fixed expenses per unit for product beta = $ 12
Total common fixed expenses for 42,000 unit = 42,000 x 12 = $ 504,000
Financial disadvantage if discontinue product beta = 504,000 - 420,000 = $ 84,000
(8) Computation of the financial advantage(or disadvantage) if product beta discontinue.We have,
Current production and sell product beta and alpha are 62,000 and 82,000 units
Net profit per unit of product beta = $ 10
Net profit per unit of product alpha = $ 17
Total profit = (82,000 x 17 ) + (62,000 x 10) = 1,394,000 + 620,000 = $ 2,014,000
If we discontinue product beta.Then, unavoidable common fixed expenses are transferred to product alpha.
Common fixed expenses per unit for product beta = $ 12
Total profit if we discontinue product beta = ( 82,000 + 17,000) x 17 - ( 62,000 x 12) = 1,683,000 - 744,000
Total profit if we discontinue product beta = $ 939,000
The financial disadvantage if we discontinue product beta = 2,014,000 - 939,000 = $ 1,075,000
(9) Computation of financial advantage(or disadvantage) if 82,000 units product alpha purchase outside.We have,
Financial advantage = ( 113 - 88 ) 82,000 - 82,000 x 17 = 2,050,000 - 1,394,000 = $ 656,000
(10) Computation of financial advantage(or disadvantage) if 52,000 units product alpha purchase outside.We have,
Financial advantage = ( 113 - 88 ) 52,000 - 52,000 x 17 = 1,300,000 - 884,000 = $ 416,000
Particulars Product alpha Product beta Selling price $ 130 $ 90 Less: Variable cost Direct Material 25 10 Direct Labor 22 21 Variable manufacturing overhead 17 7 Variable selling expenses 14 10 Contribution Margin $ 52 $ 42 Less: Fixed costs Traceable fixed manufacturing overhead 18 20 Common fixed expenses 17 12 Net profit per unit $ 17 $ 10Related Questions
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