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ID: 2592100 • Letter: U
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Use photo below to answer question subparts correctly.Check my work mode ; 'nis snows wnans correct or incorrect ror ue wor, you na e compre teu en. nuo nonn cate comple Required information The Foundational 15 [LO12-2, LO12-3, LO12-4, LO12-5, LO12-6) The following information applies to the questions displayed below 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 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufaeturing overhead Variable selling expenses Common fixed expenses Total cost per unit Alpha Beta s 15 30 16 29 19 21 $130 s 40 30 18 26 23 26 $163 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
Explanation / Answer
1.
Foundational 12-8
Determination of financial advantage or disadvantage of discontinuing the Beta product line:
Contribution margin per unit of Alpha and Beta –
Alpha
Beta
Selling price
$175
$135
Variable costs -
Direct material
$40
$15
Direct labor
$30
$30
Variable manufacturing overhead
$18
$16
variable selling expense
$23
$19
Total variable costs
$111
$80
Contribution margin
$64
$55
Traceable fixed manufacturing overhead
$26
$29
Activity level - units
117,000
117,000
Total traceable fixed manufacturing overhead
$3,042,000
$3,393,000
When Beta product line is discontinued and Sales of Alpha are increased by 11,000 units,
Contribution margin from additional sales of Alpha (11,000 x $64) $704,000
When Beta is discontinued –
Loss of contribution margin (71,000 x $55) $3,905,000
Less: Traceable fixed manufacturing overhead $3,393,000
Decrease in net operating income ($512,000)
Net increase in income $192,000
Financial advantage of discontinuing Beta product line and increasing sales of Alpha by 11,000 units is $192,000.
Foundational 12-11
Determination of the pounds of raw material needed to make one unit of each of the two products:
Alpha
Beta
Direct material cost per unit
$40
$15
raw material cost per pound
$5
$5
raw materials needed - pounds
40/5
15/5
raw materials needed per unit - pounds
8
3
Hence, the pound of raw materials needed to make one unit of each of Alpha and Beta are 8 pounds and 3 pounds, respectively.
Foundational 12-12
Determination of the contribution margin needed per pound of raw material earned by each of the two products:
Alpha
Beta
Direct material cost per unit
$40
$15
raw material cost per pound
$5
$5
raw materials needed - pounds
40/5
15/5
raw materials needed per unit - pounds
8
3
contribution margin per unit
$64
$55
Contribution margin per pound
64/8
55/3
Contribution margin per pound
$8
$18.33
Hence, the contribution margin needed per pound of raw materials earned by Alpha and Beta are $8 and $18.33, respectively.
Foundational 12-15
Given info-
Maximum units of Alpha 91,000
Maximum units of Beta 71,000
Available raw materials 225,000 pounds
Determination of the additional price per pound for additional raw materials:
Alpha Beta
Contribution margin per pound $8 $18.33
Raw material needed per unit in pounds 8 3
Since Beta product earns highest contribution margin per pound ($18.33) the available raw materials are first allocated to produce the maximum units of Beta (71,000 units)
Raw materials needed for Beta = number of pounds needed per unit x number of units
= 3 x 71,000 = 213,000 pounds
Remaining pounds for Alpha = 225,000 – 213,000 = 12,000 pounds
Alpha’s requirement of raw material = 8 pounds x 91,000 units = 728,000 pounds
Number of units that Alpha can produce with 12,000 pounds of raw material = 12,000/8 = 1,500 units
The maximum price to buy additional pounds of raw material is computed as follows,
Regular direct material cost per pound $5
Contribution margin per pound of raw material of Alpha $8
Maximum price to be paid for additional pound $13
Alpha
Beta
Selling price
$175
$135
Variable costs -
Direct material
$40
$15
Direct labor
$30
$30
Variable manufacturing overhead
$18
$16
variable selling expense
$23
$19
Total variable costs
$111
$80
Contribution margin
$64
$55
Traceable fixed manufacturing overhead
$26
$29
Activity level - units
117,000
117,000
Total traceable fixed manufacturing overhead
$3,042,000
$3,393,000
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