Cane Company manufactures two products called Alpha and Beta that sell for $190

Question

Cane Company manufactures two products called Alpha and Beta that sell for $190 and $155, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 122,000 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.

4. Assume that Cane expects to produce and sell 104,000 Betas during the current year. One of Cane’s sales representatives has found a new customer that is willing to buy 3,000 additional Betas for a price of $62 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease?

Net operating income decreases by $_____

5. Assume that Cane expects to produce and sell 109,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 24,000 additional Alphas for a price of $136 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 11,000 units.

Calculate the incremental net operating income if the order is accepted? (Loss amount should be indicated with a minus sign.)

Icremental net operation income $_____

6. Assume that Cane normally produces and sells 104,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

Profit decreases by $_____

7. Assume that Cane normally produces and sells 54,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

Profit increases by $_____.

Alpha Beta   Direct materials $ 40 $ 24   Direct labor 34 28   Variable manufacturing overhead 21 19   Traceable fixed manufacturing overhead 29 32   Variable selling expenses 26 22   Common fixed expenses 29 24   Total cost per unit $ 179 $ 149

Explanation / Answer

Solution:-

4. Profit impact as follows:-

5. Profit impact as follows:-

6. The profit impact of dropping the Beta product line is computed as follows:

*Beta’s contribution margin per unit is $62 ($155 $93). Therefore, the decrease in contribution margin if Beta is dropped would be $6,448,000 (104,000 units × $62)

7. The profit impact of dropping the Beta product line is computed as follows:

*Beta’s contribution margin per unit is $62 ($155 $93). Therefore, the decrease in contribution margin if Beta is dropped would be $3,348,000 (54,000 units × $62).

Please Rate or comment if you have any doubt regarding this solution.

Per unit Total 3,000 unit Incremental revenue (a) 62 186,000 Incremental cost: Variable cost: Direct material 24 72,000 Direct labor 28 84,000 Variable manufacturing overhead 19 57,000 Variable selling expenses 22 66,000 Total variable cost (b) 93 279,000 Incremental net operating income (a) - (b) (93,000)

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.