Question

Crane Company manufactures two products called Alpha and Beta that sell for $135 and $95, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 105,000 units of each product. Its average cost per unit for each product at this level of activity are given below:
Direct materials 30, 18
Direct labor 23,16
Variable manufacturing overhead 10, 8
Traceable fixed manufacturing overhead 19, 21
Variable selling expenses 15, 11
Common fixed expenses 18, 13
Total cost per unit 115, 87
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. Assume that Cane normally produces and sells 43,000 Betas this year. What is the financial advantage or disadvantage of discontinuing the Beta product line?
2. Assume that Cane normally produces and sells 63,000 Betas and 83,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 18,000 units. What is the financial advantage or disadvantage the Beta product line?
3. Assume that Cane expects to produce and sell 83,000 Alphas during the current year. A supplier has offered to manufacture and deliver 83,000 Alphas to Cane for a price of $92 per unit. What is the financial advantage or disadvantage of buying 83,000 units from the supplier instead of making those units?
4. Assume that Cane expects to produce and sell 53,000 Alphas during the current year. A supplier has offered to manufacture and deliver 53,000 Alphas to Cane for a price of $92 per unit. What is the financial advantage or disadvantage of buying 53,000 units from the supplier instead of making those units?

Answer 1

Working Note
	Basic Calculations
	Units	Alpha	105000	beta	105000
		Amount	Per unit	Amount	Per unit
	Variable costing Income statement
	Revenue	14175000	135	9975000	95
	Variable cost
	Direct Materials	3150000	30	1890000	18
	Direct Labor	2415000	23	1680000	16
	Variable overhead	1050000	10	840000	8
	Variable selling expenses	1575000	15	1155000	11
	Total variable costs	8190000	78	5565000	53
	Contribution margin	5985000	57	4410000	42
	Fixed costs
	Traceble fixed manufacturing overhead	1995000	19	2205000	21
	Common fixed costs	1890000	18	1365000	13
	Total fixed costs	3885000	37	3570000	34
	Operating Income	2100000	20	840000	8
Requirement 1
	There is clear financial advantages, if we discontinue the product Beta, as given below
	Contribution margin from product Beta		1806000		=43000*42
	Less : Traceble fixed costs		2205000
	Financial advantage by avoiding this loss		-399000
Requirement 2
	If Cane normally produces 83000 Alpha and 63000 Beta its variable income statement would have been
	as follow
	Units	Alpha	83000	beta	63000	Total
		Amount	Per unit	Amount	Per unit
	Variable costing Income statement
	Revenue	11205000	135	5985000	95
	Variable cost
	Direct Materials	2490000	30	1134000	18
	Direct Labor	1909000	23	1008000	16
	Variable overhead	830000	10	504000	8
	Variable selling expenses	1245000	15	693000	11
	Total variable costs	6474000	78	3339000	53
	Contribution margin	4731000	57	2646000	42
	Fixed costs
	Traceble fixed manufacturing overhead	1995000	24.04	2205000	35.00
	Margin before fixed cost	2736000		441000		3177000
	Unavoidable fixed cost					3255000
	Operating Income					-78000
	Now if cane discontinue the Beta and increase the production of Alpha by 18000 units its variable
	Income statement would have been as follow
	Units	Alpha	101000
		Amount	Per unit
	Variable costing Income statement
	Revenue	13635000	135
	Variable cost
	Direct Materials	3030000	30
	Direct Labor	2323000	23
	Variable overhead	1010000	10
	Variable selling expenses	1515000	15
	Total variable costs	7878000	78
	Contribution margin	5757000	57
	Fixed costs
	Traceble fixed manufacturing overhead	1995000	19.75
	Margin before fixed cost	3762000
	Unavoidable fixed cost	3255000
	Operating Income	507000
	Ther is clear financial advantages of avoiding loss and making profit of				585000
Requirement 3
	If cane choose to make 83000 Alpha its variable income statement would have been
	as follow.
	Units	Alpha	83000
		Amount	Per unit
	Variable costing Income statement
	Revenue	11205000	135
	Variable cost
	Direct Materials	2490000	30
	Direct Labor	1909000	23
	Variable overhead	830000	10
	Variable selling expenses	1245000	15
	Total variable costs	6474000	78
	Contribution margin	4731000	57
	Fixed costs
	Traceble fixed manufacturing overhead	1995000	24.04	102.04
	Operating income before unavoidable fixed cost	2736000
	If Cane chooses to by from outside supplier at $93 per unit its operating income before
	unavoidable fixed cost would have been as follow.
	Units	Alpha	83000
		Amount	Per unit
	Variable costing Income statement
	Revenue	11205000	135
	Less : Cost of buying	7636000	92
	Operating income before unavoidable fixed cost	3569000
	Thus, there is financial advantage of increasing profit by	=3569000-2736000
	=	833000
Requirement 4
	If cane choose to make 83000 Alpha its variable income statement would have been
	as follow.
	Units	Alpha	53000
		Amount	Per unit
	Variable costing Income statement
	Revenue	7155000	135
	Variable cost
	Direct Materials	1590000	30
	Direct Labor	1219000	23
	Variable overhead	530000	10
	Variable selling expenses	795000	15
	Total variable costs	4134000	78
	Contribution margin	3021000	57
	Fixed costs
	Traceble fixed manufacturing overhead	1995000	37.64
	Operating income before unavoidable fixed cost	1026000
	If Cane chooses to by from outside supplier at $93 per unit its operating income before
	unavoidable fixed cost would have been as follow.
	Units	Alpha	53000
		Amount	Per unit
	Variable costing Income statement
	Revenue	7155000	135
	Less : Cost of buying	4876000	92
	Operating income before unavoidable fixed cost	2279000
	Thus, there is financial advantage of increasing profit by	=2279000-1026000
	=	1253000