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.

Required:

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

4. Assume that Cane expects to produce and sell 109,000 Betas during the current year. One of Cane’s sales representatives has found a new customer who is willing to buy 5,000 additional Betas for a price of $82 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

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

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

9. 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?

10. 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?

Answer 1

2). Total Common Fixed Expenses = ($34 + $29) * 130000 units = $8,190,000

4). If cane expects to sell only 109000 Betas during the year then for the additional units order relevant cost will be only variable cost.
Variable Cost of Beta = 24 +32 + 24 + 27 = $107
At the price of $82, there is a financial disadvantage of $25 (107 - 82) per unit.
Total disadvantage = $25 * 5000 = $125000

6). Assuming cane sells only 109000 betas per year.
Contribution per unit. = $175 - $107 = $68 per unit.
Total contribution = 68 * 109000 = $7,412,000
Traceable Fixed Cost of Beta = $37 * 130000 units = $4,810,000
Disadvantage of closing the beta product = $7412000 - $4810000 = $2,602,000

7). Assuming cane sells only 59000 units of beta per year.
Contribution total = $68 * 59000 = $4,012,000
Fixed Cost tarceable = $4,810,000
Advantage of discontinuing the product line. = 4810000 * 4012000 = $798,000

9). Assuming that Cane expects to produce and sell 99,000 Alphas during the current year.
Total cost per unit exclusing common fixed cost = $209 - 34 = $175
Profit per unit = $225 - $175 = $50

If cane purchases from outside at $156 per unit.
Profit per unit = $225 - 156 = $69
Hence it is beneficial for the company to buy from outside as there is higher profit.

10). This point is also on same basis as above.