Cane Company manufactures two products called Alpha and Beta that sell for $170
ID: 2590122 • Letter: C
Question
Cane Company manufactures two products called Alpha and Beta that sell for $170 and $130, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 116,000 units of each product. Its unit costs 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 deemed unavoidable and have been allocated to products based on sales dollars.
1. Assume that Cane normally produces and sells 100,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease? Profit Increases/Decreases by ____________
2. Assume that Cane normally produces and sells 50,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease? Profit Increases/Decreases by __________
3. Assume that Cane normally produces and sells 70,000 Betas and 90,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 14,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?
Profit Increases/Decreases by _____________
4. Assume that Cane expects to produce and sell 90,000 Alphas during the current year. A supplier has offered to manufacture and deliver 90,000 Alphas to Cane for a price of $120 per unit. If Cane buys 90,000 units from the supplier instead of making those units, how much will profits increase or decrease?
Profit Increases/Decreases by __________
5. Assume that Cane expects to produce and sell 60,000 Alphas during the current year. A supplier has offered to manufacture and deliver 60,000 Alphas to Cane for a price of $120 per unit. If Cane buys 60,000 units from the supplier instead of making those units, how much will profits increase or decrease?
Profit Increases/Decreases by ___________
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Cane Company manufactures two products called Alpha and Beta that sell for $170 and $130, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 116,000 units of each product. Its unit costs for each product at this level of activity are given below:
Explanation / Answer
1. If Cane discontinues to produce 100,000 Betas then it will lose contribution on those units.
Contribution per unit
Decrease in profits if the company discontinues Beta product line = $26 x 100,000 = $2,600,000
Profit Decreases by $2,600,000
2. If Cane discontinues to produce 50,000 Betas then it will lose contribution on those units.
Contribution per unit = $26 (computed in 1.)
Decrease in profits if the company discontinues Beta product line = $26 x 50,000 = $1,300,000
Profit Decreases by $1,300,000
3. The contribution loss will be made on 70000 Betas, but on the other hand additional contribution would be made on 14000 Alphas due to discontinuation of Beta product line.
Contribution per unit of Alpha
Additional contribution income on additional 14000 units of Alpha = $42 x 14000 = $588000
Profit Decreases by $1232000.
4. Making cost per unit of Alpha:
Profit decreases by = ($120- $106) x 90000 = $1260000
5.
Making cost per unit of Aplha (computed above) = $106
Profit decreases by = ($120- $106) x 60000 = $840000
Selling price $130 Less variable costs: Direct materials 18 Direct labor 25 Variable manufacturing overhead 15 Variable selling expenses 18 Gross contribution margin $54 Less Traceable fixed manufacturing overhead 28 Net contribution margin per unit $26Related Questions
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