Cane Company manufactures two products called Alpha and Beta that sell for $130

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 $ 80

Explanation / Answer

Ans 6. Financial effect on Cane if discontinuing Beta Line is as under:-

Total Relevant cost for beta line per unit = $80 - $12 = $68*92000 units = $62,56.000 A

Total Fixed cost = $12*102,000 units = $12,24,000 B

Total Cost (A+B) = $74,80,000

Total Sale value of 92000 units = 92000*90 = $82,80,000 C

So Net profit = C-(A+B) = $800,000

So if Cane discontinued the Beta line then it will suffer with a disadvantage of $800,000.

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