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In: Accounting

Crane Company manufactures two products called Alpha and Beta that sell for $135 and $95, respectively....

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?

Solutions

Expert Solution

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

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