Cane Company manufactures two products called Alpha and Beta that sell for $120

Question

Cane Company manufactures two products called Alpha and Beta that sell for $120 and $80, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 100,000 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.

5. Assume that Cane expects to produce and sell 95,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 10,000 additional Alphas for a price of $80 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 5,000 units.

Assume that Cane normally produces and sells 90,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

Assume that Cane normally produces and sells 40,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

Assume that Cane normally produces and sells 60,000 Betas and 80,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 15,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?

Assume that Cane expects to produce and sell 80,000 Alphas during the current year. A supplier has offered to manufacture and deliver 80,000 Alphas to Cane for a price of $80 per unit. If Cane buys 80,000 units from the supplier instead of making those units, how much will profits increase or decrease?

Assume that Cane expects to produce and sell 50,000 Alphas during the current year. A supplier has offered to manufacture and deliver 50,000 Alphas to Cane for a price of $80 per unit. If Cane buys 50,000 units from the supplier instead of making those units, how much will profits increase or decrease?

erating income if the order is accepted?

Explanation / Answer

Answer: Raw material per unit
Alpha = $30 / $6 = 5lbs.
Beta = $12 / $6 = 2lbs.

Variable Costs
. . . . . . . . . . . . . . . . . . . . . . . . . . . .Alpha . . Beta
Direct materials . . . . . . . . . . . . . . . .$ 30 . . . $ 12
Direct labor . . . . . . . . . . . . . . . . . . . $20 . . . .$15
Variable manufacturing overhead . . . . . $7 . . . . $5
Variable selling expenses: . . . . . . . . $12 . . . . .$8
Totals . . . . . . . . . . . . . . . . . . . . . . . $69 . . . .$40

Contribution Margin per Unit
Alpha = 120 - 69 = $51
Beta = 80 - 40 = $40

Contribution margin per pound of raw material is earned by Alpha and Beta:
Alpha = 51 / 5 = $10.20
Beta = 40 / 2 = $20.00

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