Question

Cane Company manufactures two products called Alpha and Beta that sell for $155 and $115, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 110,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	24			$	12
Direct labor			23				26
Variable manufacturing overhead			22				12
Traceable fixed manufacturing overhead			23				25
Variable selling expenses			19				15
Common fixed expenses			22				17
Total cost per unit		$	133			$	107

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.

6. Assume that Cane normally produces and sells 97,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

7. Assume that Cane normally produces and sells 47,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

8. Assume that Cane normally produces and sells 67,000 Betas and 87,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 11,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?

9. Assume that Cane expects to produce and sell 87,000 Alphas during the current year. A supplier has offered to manufacture and deliver 87,000 Alphas to Cane for a price of $108 per unit. If Cane buys 87,000 units from the supplier instead of making those units, how much will profits increase or decrease?

10. Assume that Cane expects to produce and sell 57,000 Alphas during the current year. A supplier has offered to manufacture and deliver 57,000 Alphas to Cane for a price of $108 per unit. If Cane buys 57,000 units from the supplier instead of making those units, how much will profits increase or decrease?

Answer 1

Solution 6:

Differential Analysis - Sale Beta (97000 units) (alt 1) or Discontinue Beta (Alt2)
Particulars	Sale Beta (97000 Units) (Alt 1)		Discontinue Beta (Alt 2)		Differential effect on income (Alt 2)
	Details	Amount	Details	Amount
Revenue	97000*$115	$11,155,000.00		$0.00	-$11,155,000.00
Costs:
Direct Material	97000*$12	$1,164,000.00		$0.00	-$1,164,000.00
Direct Labor	97000*$26	$2,522,000.00		$0.00	-$2,522,000.00
Variable manufacturing Overhead	97000*$12	$1,164,000.00		$0.00	-$1,164,000.00
Variable Selling Expenses	97000*$15	$1,455,000.00		$0.00	-$1,455,000.00
Traceable Fixed manufacturing overhead	110000*$25	$2,750,000.00		$0.00	-$2,750,000.00
Common fixed expenses	110000*$17	$1,870,000.00	110000*$17	$1,870,000.00	$0.00
Income / (Loss)		$230,000.00		-$1,870,000.00	-$2,100,000.00

If Cane discontinues the Beta product line, increase in profit or loss = -$2,100,000

Solution 7:

Differential Analysis - Sale Beta (47000 units) (alt 1) or Discontinue Beta (Alt2)
Particulars	Sale Beta (47000 Units) (Alt 1)		Discontinue Beta (Alt 2)		Differential effect on income (Alt 2)
	Details	Amount	Details	Amount
Revenue	47000*$115	$5,405,000.00		$0.00	-$5,405,000.00
Costs:
Direct Material	47000*$12	$564,000.00		$0.00	-$564,000.00
Direct Labor	47000*$26	$1,222,000.00		$0.00	-$1,222,000.00
Variable manufacturing Overhead	47000*$12	$564,000.00		$0.00	-$564,000.00
Variable Selling Expenses	47000*$15	$705,000.00		$0.00	-$705,000.00
Traceable Fixed manufacturing overhead	110000*$25	$2,750,000.00		$0.00	-$2,750,000.00
Common fixed expenses	110000*$17	$1,870,000.00	110000*$17	$1,870,000.00	$0.00
Income / (Loss)		-$2,270,000.00		-$1,870,000.00	$400,000.00

If Cane discontinues the Beta product line, increase in profit or loss = $400,000

Solution 8:

Differential Analysis - Sale Alpha (87000 Units), Beta (67000 Units) (Alt 1) or Discontinue Beta & Sale Alpha (98000 Units) (Alt 2)
Particulars	Sale Alpha (87000 Units), Beta (67000 Units) (Alt 1)		Discontinue Beta & Sale Alpha (98000 Units) (Alt 2)		Differential effect on income (Alt 2)
	Details	Amount	Details	Amount
Revenue	(87000*$155) + (67000*$115)	$21,190,000.00	98000*$155	$15,190,000.00	-$6,000,000.00
Costs:
Direct Material	(87000*$24) + (67000*$12)	$2,892,000.00	98000*$24	$2,352,000.00	-$540,000.00
Direct Labor	(87000*$23) + (67000*$26)	$3,743,000.00	98000*$23	$2,254,000.00	-$1,489,000.00
Variable manufacturing Overhead	(87000*$22) + (67000*$12)	$2,718,000.00	98000*$22	$2,156,000.00	-$562,000.00
Variable Selling Expenses	(87000*$19) + (67000*$15)	$2,658,000.00	98000*$19	$1,862,000.00	-$796,000.00
Traceable Fixed manufacturing overhead	(110000*$23) + (110000*$25)	$5,280,000.00	110000*$23	$2,530,000.00	-$2,750,000.00
Common fixed expenses	(110000*$22) + (110000*$17)	$4,290,000.00	(110000*$22) + (110000*$17)	$4,290,000.00	$0.00
Income / (Loss)		-$391,000.00		-$254,000.00	$137,000.00

If Cane discontinues the Beta product line, increase in profit or loss = $137,000

Solution 9:

Differential Analysis- Cane Company - Making Alpha (alt 1) or Buying Alpha (Alt2)
Particulars	Making Alpha (Alt 1)	Buying Alpha (Alt 2)	Financial advantage (Disadvantage) of buying (Alternative 2)
Costs:
Purchase Price (87000*$108)	$0.00	$9,396,000.00	-$9,396,000.00
Direct material	$2,088,000.00	$0.00	$2,088,000.00
Direct Labor	$2,001,000.00	$0.00	$2,001,000.00
Variable mnaufacturing overhead	$1,914,000.00	$0.00	$1,914,000.00
Avoidable Fixed manufacturing Overhead	$2,530,000.00	$0.00	$2,530,000.00
Total Cost	$8,533,000.00	$9,396,000.00	-$863,000.00

Financial advantage (Disadvantage) of buying = -$863,000

Solution 10:

Differential Analysis- Cane Company - Making Alpha (alt 1) or Buying Alpha (Alt2)
Particulars	Making Alpha (Alt 1)	Buying Alpha (Alt 2)	Financial advantage (Disadvantage) of buying (Alternative 2)
Costs:
Purchase Price (57000*$108)	$0.00	$6,156,000.00	-$6,156,000.00
Direct material	$1,368,000.00	$0.00	$1,368,000.00
Direct Labor	$1,311,000.00	$0.00	$1,311,000.00
Variable mnaufacturing overhead	$1,254,000.00	$0.00	$1,254,000.00
Avoidable Fixed manufacturing Overhead	$2,530,000.00	$0.00	$2,530,000.00
Total Cost	$6,463,000.00	$6,156,000.00	$307,000.00

Financial advantage (Disadvantage) of buying = $307,000