Question

Cane Company manufactures two products called Alpha and Beta that sell for $240 and $162, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 131,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	35			$	15
Direct labor			48				23
Variable manufacturing overhead			27				25
Traceable fixed manufacturing overhead			35				38
Variable selling expenses			32				28
Common fixed expenses			35				30
Total cost per unit		$	212			$	159

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 110,000 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 60,000 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 80,000 Betas and 100,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 13,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?

       

9.	Assume that Cane expects to produce and sell 100,000 Alphas during the current year. A supplier has offered to manufacture and deliver 100,000 Alphas to Cane for a price of $160 per unit. If Cane buys 100,000 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 75,000 Alphas during the current year. A supplier has offered to manufacture and deliver 75,000 Alphas to Cane for a price of $160 per unit. If Cane buys 75,000 units from the supplier instead of making those units, how much will profits increase or decrease?

Answer 1

6.

Contribution per unit of beta

Selling price pu =$162

less

Direct material (15)

Direct labour (23)

variable mfg oh (25)

variable selling exp (28)

contribution pu 71

If company discontinues beta line

Total contribution lost = 110000*71=$7810000

Add saving in traceable mfg oh 4978000

Decrease in profit    $2832000

7.if cane sells 60000 units per year

contribution lost 60000*71= $4260000

Add saving in traceable FOH 131000*38=4978000

Increase in profit =718000$

8.computation of contribution pu of alpha

Sp pu of alpha $240

Less

Direct material $35

Direct labour $48

Variable mfg oh $27

Variable selling oh $32

Contribution pu $98

If co produces 80000 units of beta

profit or loss on discontinuance of beta

contribution lost= 80000*71 = $5680000

add saving in traceable mfg oh=$4978000

Decrease in profit =$702000

Add additional contribution on sale of 13000alpha=13000*98=$1274000

Total increase in profit=$572000

9.calculation cost pu of alpha

Direct materials 35

Direct labour 48

variable mfg oh 27

variable sell oh 32

traceable foh 35

Total cost pu 177

As cost of suplier= $160 pu

Saving pu=$17

increase in profit=$1700000

10.If cane buys 75000 units from supplier

increase n profits=7500017=$1275000