Question

Cane Company manufactures two products called Alpha and Beta that sell for $215 and $160, respectively. Each product uses only one type of raw material that costs $7 per pound. The company has the capacity to annually produce 125,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	42			$	21
Direct labor			35				28
Variable manufacturing overhead			23				21
Traceable fixed manufacturing overhead			31				34
Variable selling expenses			28				24
Common fixed expenses			31				26
Total cost per unit		$	190			$	154

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.

6.	Assume that Cane normally produces and sells 106,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

7.	Assume that Cane normally produces and sells 56,000 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 76,000 Betas and 96,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 16,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?

9.	Assume that Cane expects to produce and sell 96,000 Alphas during the current year. A supplier has offered to manufacture and deliver 96,000 Alphas to Cane for a price of $144 per unit. If Cane buys 96,000 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 71,000 Alphas during the current year. A supplier has offered to manufacture and deliver 71,000 Alphas to Cane for a price of $144 per unit. If Cane buys 71,000 units from the supplier instead of making those units, how much will profits increase or decrease?

Answer 1

As per policy only first four questions will be answered

Part 6

The profit impact of dropping the Beta product line is computed as follows :

Contribution margin lost if beta product line dropped (106000*(160-21-28-21-24))	(6996000)
Traceable fixed manufacturing overhead (125000*34)	4250000
Decrease in net operating income if beta is dropped	(2746000)

Decrease in profit $2746000

Part 7

The profit impact of dropping the Beta product line is computed as follows :

Contribution margin lost if beta product line is dropped (56000*(160-21-28-21-24))	(3696000)
Traceable fixed manufacturing overhead (125000*34)	4250000
Increase in net operating income if beta is dropped	554000

Increase in profit = 554000

Part 8

The profit impact of dropping the Beta product line is computed as follows :

Contribution margin lost if beta product line is dropped (76000*(160-21-28-21-24))	(5016000)
Traceable fixed manufacturing overhead (125000*34)	4250000
Contribution margin on additional Alpha sales (16000*(215-42-35-23-28))	1392000
Increase in net operating income if beta is dropped	626000

Increase in profit = 626000

Part 9

Cost of buying = 96000*144 = 13824000

Cost of making = (96000*(42+35+23))+(125000*31)= 13475000

Profit decreases = 13824000-13475000=349000