Question

Cane Company manufactures two products called Alpha and Beta that sell for $165 and $130, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 113,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	40			$	24
Direct labor			29				25
Variable manufacturing overhead			15				14
Traceable fixed manufacturing overhead			25				27
Variable selling expenses			21				17
Common fixed expenses			24				19
Total cost per unit		$	154			$	126

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.

1-1. Assume that Cane normally produces and sells 69,000 Betas and 89,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 13,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

1-2. Assume that Cane expects to produce and sell 89,000 Alphas during the current year. A supplier has offered to manufacture and deliver 89,000 Alphas to Cane for a price of $116 per unit. What is the financial advantage (disadvantage) of buying 89,000 units from the supplier instead of making those units?

1-3. Assume that Cane expects to produce and sell 59,000 Alphas during the current year. A supplier has offered to manufacture and deliver 59,000 Alphas to Cane for a price of $116 per unit. What is the financial advantage (disadvantage) of buying 59,000 units from the supplier instead of making those units?

2. How many pounds of raw material are needed to make one unit of each of the two products? (Alpha / Beta)

Answer 1

	Raw Material Cost	$8/Pound
		Cost break-up
			Alpha $	Beta $
	Direct Material		40	24
	Direct Labor		29	25
	Variable Manufacturing Overhead		15	14
	Variable selling expenses		21	17
	total variable cost/Unit		105	80
	Sales price		165	130
	Contribution/Unit		60	50
	Capacity		113,000	113,000
	Common Fixed Expenses/Unit		24	19
	Common Fixed Expenses		2,712,000	2,147,000
	Traceable Fixed manufacturing overhead/Unit		25	27
	Traceable Fixed manufacturing overhead		2,825,000	3,051,000
	Point-1		Alpha $	Beta $
	Normal production Units		89,000	69,000
	Contribution/Unit		60	50
	total contribution		5,340,000	3,450,000
	Common Fixed Expenses		2,712,000	2,147,000
	Traceable Fixed manufacturing overhead		2,825,000	3,051,000
	net loss		(197,000)	(1,748,000)
	total net loss		(1,945,000)
	if discontinue Beta		Alpha $
	Normal production Units		102,000
	Contribution/Unit		60
	total contribution		6,120,000
	Common Fixed Expenses		4,859,000
	Traceable Fixed manufacturing overhead		2,825,000
	net loss		(1,564,000)
	our loss will reduce by		(381,000)
	Point 2
	Purchase cost	$116*89000	10,324,000
	common fixed expenses		2,712,000
	total cost		13,036,000
	sales	$165*89000	14,685,000
	Net Profit		1,649,000
	Profit will increase by	197000+1649000	1,846,000
	Point 3
	Purchase cost	$116*59000	6,844,000
	common fixed expenses		2,712,000
	total cost		9,556,000
	sales	$165*59000	9,735,000
	Net Profit		179,000
	Profit will increase by	197000+179000	376,000
			Alpha $	Beta $
	Direct Material		40	24
	Raw Material Cost	$8/Pound
	Pound required/ unit		5	3