Question

Cane Company manufactures two products called Alpha and Beta that sell for $225 and $175, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 130,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	42			$	24
Direct labor			42				32
Variable manufacturing overhead			26				24
Traceable fixed manufacturing overhead			34				37
Variable selling expenses			31				27
Common fixed expenses			34				29
Total cost per unit		$	209			$	173

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 109,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line. And Assume that Cane normally produces and sells 59,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

2. Assume that Cane normally produces and sells 79,000 Betas and 99,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 12,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

3. Assume that Cane expects to produce and sell 99,000 Alphas during the current year. A supplier has offered to manufacture and deliver 99,000 Alphas to Cane for a price of $156 per unit. What is the financial advantage (disadvantage) of buying 99,000 units from the supplier instead of making those units?

4. Assume that Cane expects to produce and sell 74,000 Alphas during the current year. A supplier has offered to manufacture and deliver 74,000 Alphas to Cane for a price of $156 per unit. What is the financial advantage (disadvantage) of buying 74,000 units from the supplier instead of making those units?

thank you

Answer 1

Statement of contribution
	Alpha	Beta
Sales price(a)	225	175
Less:
Direct mateial	42	24
Direct labot	42	32
variable manuf. overhead	26	24
Variable selling expense	31	27
Total(b)	141	107
Contribution(a-b)	84	68
Traceable fixed manufacturing overhead	34	37

1
		discountinue units of beta	109000
		contribution lost from discontinuing beta	7412000	109000*68
	less	saving from traceable fixed cost(Avoidable)	4810000	130000*37
		net decrease in operating income	2602000
		discountinue units	59000
		contribution lost from discontinuing beta	4012000
	less	saving from traceable fixed cost(Avoidable)	4810000
		net increase in operating income	798000
2		discountinue units	79000
		contribution lost from discontinuing beta	5372000	79000*68
	less	saving from traceable fixed cost(Avoidable)	4810000	130000*37
	less	contribution from additional units of alpha	1008000	12000*84
		net decrease in operating income	446000
3,4		Relevant cost of producing alpha	1	99000		74000
		total cost (from statement of contribution)	141	13959000	cost p.u*units	10434000
	less	variable selling expense	31	3069000		2294000
	add	Traceable fixed manufacturing overhead	34	4420000	34*130000	4420000
		relevant cost of producing alpha		15310000		12560000
	less	offer from supplier	156	15444000	cost p.u*units	11544000
		loss/gain from accepting offer	loss	-134000	gain	1016000