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:

	Alpha				Beta
Direct materials		$	30			$	12
Direct labor			20				15
Variable manufacturing overhead			7				5
Traceable fixed manufacturing overhead			16				18
Variable selling expenses			12				8
Common fixed expenses			15				10
Total cost per unit		$	100			$	68

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.

1.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?

2.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?

3.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?

4.How many pounds of raw material are needed to make one unit of Alpha and one unit of Beta?

5. What contribution margin per pound of raw material is earned by Alpha and Beta? (Round your answers to 2 decimal places.)

6.Assume that Cane’s customers would buy a maximum of 80,000 units of Alpha and 60,000 units of Beta. Also assume that the company’s raw material available for production is limited to 160,000 pounds. How many units of each product should Cane produce to maximize its profits?

7.Assume that Cane’s customers would buy a maximum of 80,000 units of Alpha and 60,000 units of Beta. Also assume that the company’s raw material available for production is limited to 160,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?

8.Assume that Cane’s customers would buy a maximum of 80,000 units of Alpha and 60,000 units of Beta. Also assume that the company’s raw material available for production is limited to 160,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)

Answer 1

	Statement Showing Calulation of Gain/loss per unit in Present Case:
		Alpha	Beta	Total
	Selling Price (A)	$120	$80	$200
	Variable Cost :
	Direct materials	$30	$20	$50
	Direct Labor	$20	$15	$35
	Variable Manf. O/H	$7	$5	$12
	Variable Selling O/H	$12	$8	$20
	Total Variable Cost (B)	$69	$48	$117
	Contribution (C)= (A-B)	$51	$32	$83
	Fixed Cost :
	Traceable Fixed Manf. O/H	$16	$18	$34
	Common Fixed Cost	$15	$10	$25
	Total Fixed Cost (D)	$31	$28	$59
	Net Gain/Loss (C-D)	$20	$4	$24
Q1.	Statement Showing Increase or Decrease in profit,If Beta Product is Discontinued
	Increase in profit by additional sales of Alpha		$5,25,000
			[15000*(51-16)]
	Loss of contribution		$8,40,000
			[60000*(32-18)]
	Decrease in Profit		$3,15,000
Q2.	Statement Showing Increase or Decrease in profit,If alpha Product is not manufactured
	Savings in Variable Cost		$85
			[69+16]
	Cost of purchase from outside		$80
	Increase in profit / unit		$5
	Total Increase in profit		$4,00,000
			[80000*5]
Q3	Statement Showing Increase or Decrease in profit,If alpha Product is not manufactured
	Savings in Variable Cost		$85
			[69+16]
	Cost of purchase from outside		$80
	Increase in profit / unit		$5
	Total Increase in profit		$2,50,000
			[50000*5]
Q4	Pounds of raw material require to make one unit of Alpha and one unit of Beta
		Alpha	Beta
	Cost of Material	$30	$12
	Cost per pound	$6	$6
	No. of Pounds required	5	2
Q5	Statement Showing contribution margin per pound of raw material is earned by Alpha and Beta
		Alpha	Beta
	Contribution	$51	$32
	No. of Pounds required	5	2
	Contribution/ Pound	$10.20	$16.00
Q6	No. units of each product should Cane produce to maximize its profits,if raw material available for production is limited to 160,000 pounds
	Contribution/ Pound	$10.20	$16.00
	Rank	II	I
	No. of units of Beta		60,000
	Raw material requied by Beta		1,20,000 pounds
			[60,000*2]
	No. of units of Alpha		8000
			[(1,60,000 - 1,20,000)/5]
Q7	Maximum contribution margin Cane Company can earn given the limited quantity of raw materials
	Contribution from Beta	$30,60,000
		(60000*51)
	Contribution From Alpha	$4,08,000
		(8000*51)
	Total Contribution	$34,68,000
Q8	how much should it be willing to pay per pound for additional raw materials
		Alpha
	Contribution	$51
	No. of Pounds required	5
	Maximum Material Cost / pound	$10.20