Question

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Cane Company manufactures two products called Alpha and Beta that sell for $155 and $115, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 110,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	24			$	12
Direct labor			23				26
Variable manufacturing overhead			22				12
Traceable fixed manufacturing overhead			23				25
Variable selling expenses			19				15
Common fixed expenses			22				17
Total cost per unit		$	133			$	107

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 102,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 17,000 additional Alphas for a price of $108 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 9,000 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.

Required information

6. Assume that Cane normally produces and sells 97,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

7.

Required information

7. Assume that Cane normally produces and sells 47,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

8.

Required information

8. Assume that Cane normally produces and sells 67,000 Betas and 87,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 11,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?

Answer 1

5a.
Incremental Net Operating Income = ($263000)

Increase in Contribution	$       340,000	=17000*(108-24-23-22-19)
Contribution Margin lost from regular sales	$      (603,000)	=-9000*(155-24-23-22-19)
Financial Advantage (Disadvantage)	$     (263,000)

b.
No special order should not be accepted

6.

Contribution Margin Lost	$   (4,850,000)	=-97000*(115-12-26-12-15)
Saving of Fixed Expenses	$    2,750,000	=110000*25
Financial Advantage (Disadvantage)	$ (2,100,000)

7.

Contribution Margin Lost	$   (2,350,000)	=-47000*(115-12-26-12-15)
Saving of Fixed Expenses	$    2,750,000	=110000*25
Financial Advantage (Disadvantage)	$       400,000

8.

Contribution Margin Lost (Beta)	$   (3,350,000)	=-67000*(115-12-26-12-15)
Saving of Fixed Expenses	$    2,750,000	=110000*25
Increase in Contribution margin (Alpha)	$       737,000	=11000*(155-24-23-22-19)
Financial Advantage (Disadvantage)	$       137,000