Question

Please answer the question which number 5 to 8

[The following information applies to the questions displayed below.]

Cane Company manufactures two products called Alpha and Beta that sell for $195 and $150, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 123,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	40			$	15
Direct labor			34				28
Variable manufacturing overhead			22				20
Traceable fixed manufacturing overhead			30				33
Variable selling expenses			27				23
Common fixed expenses			30				25
Total cost per unit		$	183			$	144

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 110,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 25,000 additional Alphas for a price of $140 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 12,000 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

Required information

6.	Assume that Cane normally produces and sells 105,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

       

Required information

8.	Assume that Cane normally produces and sells 75,000 Betas and 95,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 15,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?

       

Answer 1

	Cane Company
5)
	Selling Price of additional Alphas	$                                 140.00
a)	Sales (Units) of additional Alphas	25000
	Reducing Sales of regular customers	12000
		Per Unit	Total
	Incremental Revenue(25000 Units)(25000*$140)=(A)	$                                 140.00	$               35,00,000.00
	Incremental Cost
	Variable Costs:
	Direct Material=(12000*$40)	$                                   40.00	$                 4,80,000.00
	Direct Labor=(12000*$34)	$                                   34.00	$                 4,08,000.00
	Variable manufacturing overhead=(!2000*$22)	$                                   22.00	$                 2,64,000.00
	Variable selling expenses=(12000*$27)	$                                   27.00	$                 3,24,000.00
	Total Variable Costs=(B)	$                                 123.00	$               14,76,000.00
	Reducing Sales of regular customers(12000*$195)= (C )		$               23,40,000.00
	Incremental Net Operating Income=(A)-(B)-(C )		$               -3,16,000.00
5b)	Special order should not be accepted ,because it would result decrease net operating income.
6)	Contribution Margin per unit =Sales Price per unit-Variable cost per unit
	Decrease of Beta Product line sales(Units)	105000
	Avoidable Fixed Manufacturing Expenses(Traceable Fixed manufacturing overhead)=(123000*$33)	4059000
	Sales per unit=(A)	$                                 150.00
	Variable Cost per unit
	Direct Material	$                                   15.00
	Direct Labor	$                                   28.00
	Variable manufacturing overhead	$                                   20.00
	Variable selling expenses	$                                   23.00
	Total Variable Costs=(B)	$                                   86.00
	Contribution Margin per unit($150-$86)	$                                   64.00
	Contribution Margin lost(105000*$64)=(A)	$                   -67,20,000.00
	Aviodable Fixed Manufacturing Overhe=(B)	$                     40,59,000.00
	Decrease in Net operating Income if Beta Product line is dropped=(A)+(B)	$                   -26,61,000.00
8)	Contribution margin lost if the Beta product line is dropped
	Decrease of Beta Product line sales(Units)	75000
	Avoidable Fixed Manufacturing Expenses(Traceable Fixed manufacturing overhead)	$                     40,59,000.00
	Contribution Margin Per unit of Alpha=($195-$40-$34-$22-$27)	$                                   72.00
	Sales per unit of Beta=(A)	$                                 150.00
	Variable Cost per unit of Beta
	Direct Material	$                                   15.00
	Direct Labor	$                                   28.00
	Variable manufacturing overhead	$                                   20.00
	Variable selling expenses	$                                   23.00
	Total Variable Costs=(B)	$                                   86.00
	Contribution Margin per unit($150-$86)	$                                   64.00
	Contribution Margin lost(75000*$64)=(A)	$                   -48,00,000.00
	Aviodable Fixed Manufacturing Overhe=(B)	$                     40,59,000.00
	Decrease in Net operating Income if Beta Product line is dropped=(A)+(B)	$                     -7,41,000.00
	Add: Increase in Contribution margin by sales of 15000 units of Alpha=(15000*$72)	$                     10,80,000.00
	Net Increase in Income	$                       3,39,000.00