Cane Company manufactures two products called Alpha and Beta that sell for $175
ID: 2583231 • Letter: C
Question
Cane Company manufactures two products called Alpha and Beta that sell for $175 and $135, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 117,000 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.
3. Assume that Cane expects to produce and sell 91,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 21,000 additional Alphas for a price of $124 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?
4. Assume that Cane expects to produce and sell 101,000 Betas during the current year. One of Cane’s sales representatives has found a new customer who is willing to buy 3,000 additional Betas for a price of $59 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?
5. Assume that Cane expects to produce and sell 106,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 21,000 additional Alphas for a price of $124 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 10,000 units.
a. What is the financial advantage (disadvantage) of accepting the new customer’s order?
b. Based on your calculations above should the special order be accepted?
6. Assume that Cane normally produces and sells 101,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?
7. Assume that Cane normally produces and sells 51,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?
8. Assume that Cane normally produces and sells 71,000 Betas and 91,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 11,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?
9. Assume that Cane expects to produce and sell 91,000 Alphas during the current year. A supplier has offered to manufacture and deliver 91,000 Alphas to Cane for a price of $124 per unit. What is the financial advantage (disadvantage) of buying 91,000 units from the supplier instead of making those units?
10. Assume that Cane expects to produce and sell 61,000 Alphas during the current year. A supplier has offered to manufacture and deliver 61,000 Alphas to Cane for a price of $124 per unit. What is the financial advantage (disadvantage) of buying 61,000 units from the supplier instead of making those units?
11. How many pounds of raw material are needed to make one unit of each of the two products?
12. What contribution margin per pound of raw material is earned by each of the two products?
13. Assume that Cane’s customers would buy a maximum of 91,000 units of Alpha and 71,000 units of Beta. Also assume that the company’s raw material available for production is limited to 225,000 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 91,000 units of Alpha and 71,000 units of Beta. Also assume that the company’s raw material available for production is limited to 225,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?
15. Assume that Cane’s customers would buy a maximum of 91,000 units of Alpha and 71,000 units of Beta. Also assume that the company’s raw material available for production is limited to 225,000 pounds. If Cane uses its 225,000 pounds of raw materials, up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)
Alpha Beta Direct materials $ 40 $ 15 Direct labor 30 30 Variable manufacturing overhead 18 16 Traceable fixed manufacturing overhead 26 29 Variable selling expenses 23 19 Common fixed expenses 26 21 Total cost per unit $ 163 $ 130Explanation / Answer
Answer 3. Statement of Incremental Profit If order is Accepted of Alpha - 21,000 Units Particulars Amount Increase in Sales (21,000 Units X $124) 2,604,000 Less: Increase in Costs Variable Cost Direct Material (21,000 Units X $40) (840,000) Direct Labour (21,000 Units X $30) (630,000) Variable MOH (21,000 Units X $18) (378,000) Variable Selling Exp. (21,000 Units X $23) (483,000) (2,331,000) Incremental Profit / (Loss) 273,000 Profit will be increased by $273,000, if order is Accepted. Note: We assumed that Variable Selling exp. Will be incurred on the Special order ia Accepted. Answer 4. Statement of Incremental Profit If order is Accepted of Beta - 3,000 Units Particulars Amount Increase in Sales (3,000 Units X $59) 177,000 Less: Increase in Costs Variable Cost Direct Material (3,000 Units X $15) (45,000) Direct Labour (3,000 Units X $30) (90,000) Variable MOH (3,000 Units X $16) (48,000) Variable Selling Exp. (3,000 Units X $19) (57,000) (240,000) Incremental Profit / (Loss) (63,000) Profit will be decreased by $63,000, if order is Accepted. Note: We assumed that Variable Selling exp. Will be incurred on the Special order ia Accepted. Answer 5-a. Statement of Incremental Profit If order is Accepted of Alpha - 21,000 Units Particulars Amount Increase in Sales (21,000 Units X $124) 2,604,000 Less: Increase in Costs Variable Cost Direct Material (21,000 Units X $40) (840,000) Direct Labour (21,000 Units X $30) (630,000) Variable MOH (21,000 Units X $18) (378,000) Variable Selling Exp. (21,000 Units X $23) (483,000) Loss of Contribution to Normal Customers - 10,000 Units X $64 (640,000) (2,971,000) Incremental Profit / (Loss) (367,000) Profit will be decreased by $367,000, if order is Accepted. Note: We assumed that Variable Selling exp. Will be incurred on the Special order ia Accepted. Answer 5-b. No, Special order should not be accepted. Answer 6. Statement of Incremental Profit If Beta is Discontinued - 101,000 Units Particulars Amount Incremental Revenue - savings in Costs Direct Material (101,000 Units X $15) 1,515,000 Direct Labour (101,000 Units X $30) 3,030,000 Variable MOH (101,000 Units X $16) 1,616,000 Variable Selling Exp. (101,000 Units X $19) 1,919,000 Traceable Fixed Manf. Costs - 117,000 Units X $29 3,393,000 11,473,000 Incremental Cost Loss of Sales Revenue - 101,000 Units X $135 (13,635,000) Incremental Profit / (Loss) (2,162,000) Profit will be decreased by $2,162,000, if Beta is discontinued.
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