Question

Cane Company manufactures two products called Alpha and Beta that sell for $170 and $130, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 116,000 units of each product. Its unit costs for each product at this level of activity are given below:

Alpha Beta Direct materials Alpha- $30 Beta- $18

Direct labor Alpha- 30 Beta- 25

Variable manufacturing overhead Alpha- 20 Beta- 15

Traceable fixed manufacturing overhead Alpha-26 Beta- 28

Variable selling expenses Alpha- 22 Beta- 18

Common fixed expenses Alpha- 25 Beta- 20

Total cost per unit Alpha- $153 Beta- $124

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.

7. Assume that Cane normally produces and sells 50,000 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 70,000 Betas and 90,000 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 90,000 Alphas during the current year. A supplier has offered to manufacture and deliver 90,000 Alphas to Cane for a price of $120 per unit. If Cane buys 90,000 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 60,000 Alphas during the current year. A supplier has offered to manufacture and deliver 60,000 Alphas to Cane for a price of $120 per unit. If Cane buys 60,000 units from the supplier instead of making those units, how much will profits increase or decrease?

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

12. What contribution margin per pound of raw material is earned by Alpha and Beta? Alpha - Beta -

13. Assume that Cane’s customers would buy a maximum of 90,000 units of Alpha and 70,000 units of Beta. Also assume that the company’s raw material available for production is limited to 221,000 pounds. How many units of each product should Cane produce to maximize its profits? Alpha - Beta –

14. Assume that Cane’s customers would buy a maximum of 90,000 units of Alpha and 70,000 units of Beta. Also assume that the company’s raw material available for production is limited to 221,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?

15. Assume that Cane’s customers would buy a maximum of 90,000 units of Alpha and 70,000 units of Beta. Also assume that the company’s raw material available for production is limited to 221,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials?

Answer 1

Following is the breakup of cost :

Particulars	Alpha	Beta	Nature of cost
Selling Price	170	130
Direct Material	30	18	Variable
Direct labor	30	25	Variable
Variable Manufacturing Overhead	20	15	Variable
Tracable Fixed Manufacturing Overhead	26	28	Variable
Variable Selling expenses	22	18	Variable
Common Fixed Expenses	25	20	Fixed
Total Cost	153	124

The tracable manufacturing overhead is said to be avoidable which means if product is discontinued such cost wont be incurred it means those are variable cost whereas common fixed cost is not avoidable hence it is fixed cost.

On this basis we can workout contribution product wise :

Particulars	Alpha	Beta
Selling Price	170	130
Variable Cost	128	104
Contribution	42	26

7. Assume that Cane normally produces and sells 50,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

Profit Decrease by -1,300,000 = 26 (Contribution per unit of Beta) *50,000 (Quantity of Beta)

8. Assume that Cane normally produces and sells 70,000 Betas and 90,000 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?

Profit Decrease by -1,232,000=14000*42-70000*26

9. Assume that Cane expects to produce and sell 90,000 Alphas during the current year. A supplier has offered to manufacture and deliver 90,000 Alphas to Cane for a price of $120 per unit. If Cane buys 90,000 units from the supplier instead of making those units, how much will profits increase or decrease?

Increase in Profit by 720,000 = (128 (Variable Cost) - 120(Purchase Cost))*90,000

10. Assume that Cane expects to produce and sell 60,000 Alphas during the current year. A supplier has offered to manufacture and deliver 60,000 Alphas to Cane for a price of $120 per unit. If Cane buys 60,000 units from the supplier instead of making those units, how much will profits increase or decrease?

Increase in Profit by 480,000 = (128 (Variable Cost) - 120(Purchase Cost))*60,000

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

Alpha - 5 Pound (30/6)

Beta - 3 Pound (18/6)

12. What contribution margin per pound of raw material is earned by Alpha and Beta? Alpha - Beta -

Alpha - 8.4 per pound (42/5)

Beta - 8.67 per pound (26/3)

13. Assume that Cane’s customers would buy a maximum of 90,000 units of Alpha and 70,000 units of Beta. Also assume that the company’s raw material available for production is limited to 221,000 pounds. How many units of each product should Cane produce to maximize its profits? Alpha - Beta –

Since contribution of Beta per pound of raw material is higher so first preference would be given to Beta

Beta - 70,000

Alphs - 2,200 ((221,000-70,000*3)/5)

14. Assume that Cane’s customers would buy a maximum of 90,000 units of Alpha and 70,000 units of Beta. Also assume that the company’s raw material available for production is limited to 221,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?

The quantity to be produced is worked out in Q.13 to be mutliplied with contribution of product

Beta - 70,000*26 = 1,820,000

Alpha - 2200*42 = 92,400

Total 1,912,400

15. Assume that Cane’s customers would buy a maximum of 90,000 units of Alpha and 70,000 units of Beta. Also assume that the company’s raw material available for production is limited to 221,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials?

As worked out in Q.13 Beta product full quota can be produced and Alpha's partial quota can be produced based on available raw material. For additioanl raw materail what can be produced will be Alpha product.

Cane is loosing 8.4 per pound contribution so he can pay anything lesser than 14.4 (8.4+6) per pound of raw material.