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:

    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     

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 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.

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

b. Based on your calculations above should the special order be accepted?

   Yes
   No

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?

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?

8. Assume that Cane normally produces and sells 74,000 Betas and 94,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 14,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?

9. Assume that Cane expects to produce and sell 94,000 Alphas during the current year. A supplier has offered to manufacture and deliver 94,000 Alphas to Cane for a price of $136 per unit. If Cane buys 94,000 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 69,000 Alphas during the current year. A supplier has offered to manufacture and deliver 69,000 Alphas to Cane for a price of $136 per unit. If Cane buys 69,000 units from the supplier instead of making those units, how much will profits increase or decrease?

Answer 1

Answer :

(5)

(a)Calculation of  incremental net operating income if the order is accepted :

Particulars	Amount ($)	Amount ($)	Calculations
Incremental revenue		32,64,000	(24,000 units × $136)
Incremental variable costs:
Direct materials	520,000		(13,000 units × $40)
Direct labor	442,000		(13,000 units × $34)
Variable manufacturing overhead	273,000		(13,000 units × $21)
Variable selling expenses	338,000		(13,000 units × $26)
Total incremental variable cost		15,73,000
Foregone sales to regular customers		20,90,000	(11,000 units × $190)
Incremental net operating income		-3,99,000

(b) Because Incremental net operating Income is negative, No Special order should not be accepted.

(6)

Beta's sale price = $155

Beta's Variable Costs = 24 + 28 + 19 + 22 = $93

Contribution margin per unit = $155 - 93 = $62

Contribution margin lost if the Beta product line is dropped = $62 x 104,000 units = $6,448,000

Traceable fixed manufacturing overhead = 122,000 units x $32 = $3,904,000

Decrease in net operating income if Beta is dropped = Contribution margin lost - Traceable fixed manufacturing overhead

= $6,448,000 - $3,904,000 = $2,544,000

So, Profits will decrease by $2,544,000

(7)

Contribution margin lost if the Beta product line is dropped = $62 x 54,000 units = $3,348,000

Traceable fixed manufacturing overhead = $3,904,000

Increase in net operating income if Beta is dropped =$3,904,000 - $3,348,000 = $556,000

So, Profits will Increase by $556,000

(8)

Alpha's sale price = $190

Alpha's Variable Costs = 40 + 34 + 21 + 26 = $121

Contribution margin per unit = $190 - 121 = $69

Particulars	Amount	Calculations
Contribution margin lost if the Beta product line is dropped	(4,588,000)	$62 x 74,000
Traceable fixed manufacturing overhead	3,904,000	$32 x 122,000
Contribution margin on additional Alpha sales	966,000	$69 x 14,000
Increase in net operating income if Beta is dropped	282,000

(9)

Particulars	Amount	Calculations
Direct materials	3,760,000	(94,000 units × $40)
Direct labor	3,196,000	(94,000 units × $34)
Variable manufacturing overhead	1,974,000	(94,000 units × $21)
Traceable fixed manufacturing overhead	3,538,000	(122,000 x 29)
Total costs of Making	12,468,000

Total costs of Making = $12,468,000

Total Costs of Buying = 94,000 x 136 = $12,784,000

Decrease in profits = $12,784,000 - $12,468,000 = $316,000

So, Profits will be decreased by $316,000

(10)

Particulars	Amount	Calculations
Direct materials	2,760,000	(69,000 units × $40)
Direct labor	2,346,000	(69,000 units × $34)
Variable manufacturing overhead	1,449,000	(69,000 units × $21)
Traceable fixed manufacturing overhead	3,538,000
Total costs of Making	10,093,000

Total costs of Making = $10,093,000

Total Costs of Buying = 69,000 x 136 = $9,384,000

Increase in Profits = $10,093,000 - $9,384,000 = $709,000

So, Profits will be increased by $709,000