Question
In: Accounting
Cane Company manufactures two products called Alpha and Beta that sell for $155 and $115, respectively....
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?
Solutions
Expert Solution
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
ekkarill92 answered 3 months agoRelated Solutions
Cane Company manufactures two products called Alpha and Beta that sell for $155 and $115, respectively....
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
average cost per unit for each product at this level of activity
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Cane Company manufactures two products called Alpha and Beta that sell for $155 and $115, respectively....
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
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average cost per unit for each product at this level of activity
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Cane Company manufactures two products called Alpha and Beta that sell for $155 and $115, respectively....
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
average cost per unit for each product at this level of activity
are given below:
Alpha
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Direct materials
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Direct labor
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Variable manufacturing overhead
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Cane Company manufactures two products called Alpha and Beta that sell for $155 and $115, respectively....
Cane Company manufactures two products called Alpha and Beta
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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:
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