Question

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 average cost per unit 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 unavoidable and have been allocated to products based on sales dollars.

3. Assume that Cane expects to produce and sell 87,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 17,000 additional Alphas for a price of $108 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

4. Assume that Cane expects to produce and sell 97,000 Betas during the current year. One of Cane’s sales representatives has found a new customer who is willing to buy 3,000 additional Betas for a price of $46 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

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 who is willing to buy 17,000 additional Alphas for a price of $108 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 9,000 units.

a. What is the financial advantage (disadvantage) of accepting the new customer’s order?

b. Based on your calculations above should the special order be accepted?

6. Assume that Cane normally produces and sells 97,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

7. Assume that Cane normally produces and sells 47,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

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. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

Answer 1

Solution:

Basic calculation

Total Variable Cost per Unit	Alpha	Beta
Direct materials	$24	$12
Direct labor	$23	$26
Variable Manufacturing overhead	$22	$12
Variable selling expenses	$19	$15
Total Variable Cost per Unit	$88	$65
Contribution Margin Per Unit	Alpha	Beta
Unit Selling Price	$155	115
Unit Selling price inclusive selling expense	$88	$65
Contribution Margin Per Unit	$67	$50
Total Traceable Fixed manufacturing overhead	$2,530,000 (23*110000 units)	$2,750,000 (25*110,000 Units)

Part 3 –

It is given in the question that regular production of Alphas is 87,000 Units and the capacity is 110,000 Units.

So the total production for Alphas including special order quantity = 87,000 Units regular + 17,000 Units special order = 104,000 Units

104,000 Units are within the capacity of the company.

So, increase in profit = Increase in contribution for the special order

Financial Advantage of accepting the new customer’s order

Unit Selling Price of Special Order	$108	Per Unit
Less: Unit Variable Cost (Refer basic calculation)	$88	Per Unit
Contribution Margin (Special Order) per unit	$20	Per Unit
x Number of Units of Special Order	17,000	Units
Financial advantage (increase in profit) from special order (17,000 Units x CM per Unit $20)	$340,000

Part 4 –

3,000 additional betas are within the capacity of firm.

There will be a decrease or disadvantage in profit since the unit selling price is less than the variable cost.

Financial Disadvantage of accepting the new customer’s order

	Beta
Unit Selling Price of Special Order	$46	Per Unit
Less: Unit Variable Cost (Refer basic calculation)	$65	Per Unit
Contribution Margin (Special Order) per unit	($19)	Per Unit
x Number of Units of Special Order	3,000	Units
Financial disadvantage (decrease in profit) from special order (3,000 Units x CM per Unit -$19)	($57,000)

Part 5(a) –

	Alpha
Contribution from New Customers Order (Refer Part 3)	$340,000
Contribution Loss on Regular Customers ($67 Refer basic calculation * 9,000 Units)	$603,000
Incremental Net Operating Income/(loss)	($263,000)

$67 is the contribution margin per unit of Alpha as per the basic calculation

Part 5(b) –

Special order SHOULD NOT be accepted since this will result an incremental loss of $263,000

Part 6 –

Disadvantage of discontinuing Beta product line

	Beta
Loss of Contribution Margin from regular sale of Beta (97,000 Units * $50)	($4,850,000)
Saving in Traceable Fixed Manufacturing Overhead (Refer basic calculation)	$2,750,000
Disadvantage (decrease) in profit	($2,100,000)

$50 is the contribution margin per unit of Beta.

Part 7 –

	Beta
Loss of Contribution Margin from regular sale of Beta (47,000 Units * $50)	($2,350,000)
Saving in Traceable Fixed Manufacturing Overhead (Refer basic calculation)	$2,750,000
Advantage / Increase in profit	$400,000

Part 8 –

First of all we need to calculate the Advantage/(Disadvantage) of discontinuing Beta product line and then need to calculate the incremental profit from increase in Alpha sale units.

Financial advantage (disadvantage) of discontinuing the Beta product line
Loss of Contribution Margin from regular sale of Beta (67,000 Units * $50)	($3,350,000)
Saving in Traceable Fixed Manufacturing Overhead (Refer basic calculation)	$2,750,000
Disadvantage (decrease) in profit (A)	($600,000)
Increase in Contribution from Alpha (B) (increase in units 11,000 Units * CM per Unit $67)	$737,000
Financial advantage (increase) in Profit (A+B)	$137,000

Hope the above calculations, working and explanations are clear to you and help you to understand the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you