Question

Cane Company manufactures two products called Alpha and Beta that sell for $170 and $130, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 116,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	30			$	18
Direct labor			30				25
Variable manufacturing overhead			20				15
Traceable fixed manufacturing overhead			26				28
Variable selling expenses			22				18
Common fixed expenses			25				20
Total cost per unit		$	153			$	124

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.

Required:

1. What is the total amount of traceable fixed manufacturing overhead for each of the two products?

2. What is the company’s total amount of common fixed expenses?

3. Assume that Cane expects to produce and sell 90,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 20,000 additional Alphas for a price of $120 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

4. Assume that Cane expects to produce and sell 100,000 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 $49 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

5. Assume that Cane expects to produce and sell 105,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 20,000 additional Alphas for a price of $120 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? Yes or NO

6. Assume that Cane normally produces and sells 100,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

7. Assume that Cane normally produces and sells 50,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

8. Assume that Cane normally produces and sells 70,000 Betas and 90,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 14,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

9. Assume that Cane expects to produce and sell 90,000 Alphas during the current year. A supplier has offered to manufacture and deliver 90,000 Alphas to Cane for a price of $120 per unit. What is the financial advantage (disadvantage) of buying 90,000 units from the supplier instead of making those units?

10. Assume that Cane expects to produce and sell 60,000 Alphas during the current year. A supplier has offered to manufacture and deliver 60,000 Alphas to Cane for a price of $120 per unit. What is the financial advantage (disadvantage) of buying 60,000 units from the supplier instead of making those units?

11. How many pounds of raw material are needed to make one unit of each of the two products?

12. What contribution margin per pound of raw material is earned by each of the two products? (Round your answers to 2 decimal

13. Assume that Cane’s customers would buy a maximum of 90,000 units of Alpha and 70,000 units of Beta. Also assume that the raw material available for production is limited to 221,000 pounds. How many units of each product should Cane produce to maximize its profits?

14. Assume that Cane’s customers would buy a maximum of 90,000 units of Alpha and 70,000 units of Beta. Also assume that the raw material available for production is limited to 221,000 pounds. What total contribution margin will it earn?

15. Assume that Cane’s customers would buy a maximum of 90,000 units of Alpha and 70,000 units of Beta. Also assume that the raw material available for production is limited to 221,000 pounds. If Cane uses its 221,000 pounds of raw materials, up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)

Answer 1

1.

	alpha	beta
Units(A)	116000	116000
Traceable Fixed manufacturing overhead per unit(B)	26	28
Total Traceable Fixed manufacturing overhead (AXB)	3,016,000	3,248,000

2

	alpha	beta	Total company
units(a)	116000	116000
common Fixed expenses per unit(b)	25	20
common Fixed expenses (aXb)	2,900,000	2,320,000	5,220,000

3 .

	alpha
sales	120
direct material	(30)
direct labour	(30)
variable manufacturing overhead	(20)
variable selling expense	(22)
contribution per unit	18
Traceable Fixed manufacturing overhead	(26)
Profit (a)	(8)
units     (b)	20,000
Financial advantage (disdvantage) a*b	(160,000)

4.

	beta
sales	49
direct material	(18)
direct labour	(25)
variable manufacturing overhead	(15)
variable selling expense	(18)
contribution per unit	(27)
Traceable Fixed manufacturing overhead	(28)
Profit (a)	(55)
units    (b)	3,000
Financial advantage (disdvantage) a*b	(165,000)