Question

Cane Company manufactures two products called Alpha and Beta that sell for $140 and $100, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 106,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	32			$	16
Direct labor			24				19
Variable manufacturing overhead			10				9
Traceable fixed manufacturing overhead			20				22
Variable selling expenses			16				12
Common fixed expenses			19				14
Total cost per unit		$	121			$	92

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 99,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 14,000 additional Alphas for a price of $96 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 7,000 units.

a. Calculate the incremental net operating income if this order is accepted?

incremental net operating income

6.

Assume that Cane normally produces and sells 94,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease? Profit DECREASE by:    7.

Assume that Cane normally produces and sells 44,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease? profit INCREASE by?    8. Assume that Cane normally produces and sells 64,000 Betas and 84,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 19,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease? Profit INCREASE by? 9. Assume that Cane expects to produce and sell 84,000 Alphas during the current year. A supplier has offered to manufacture and deliver 84,000 Alphas to Cane for a price of $96 per unit. If Cane buys 84,000 units from the supplier instead of making those units, how much will profits increase or decrease? Profit DECREASE by?    10. Assume that Cane expects to produce and sell 54,000 Alphas during the current year. A supplier has offered to manufacture and deliver 54,000 Alphas to Cane for a price of $96 per unit. If Cane buys 54,000 units from the supplier instead of making those units, how much will profits increase or decrease? profit INCREASE by? 11. How many pounds of raw material are needed to make one unit of Alpha and one unit of Beta? pounds of raw material per unit alpha    beta    12. What contribution margin per pound of raw material is earned by Alpha and Beta? contribution margin per pound alpha    Beta    13.Assume that Cane’s customers would buy a maximum of 84,000 units of Alpha and 64,000 units of Beta. Also assume that the company’s raw material available for production is limited to 166,000 pounds. How many units of each product should Cane produce to maximize its profits? units produced alpha beta 14. Assume that Cane’s customers would buy a maximum of 84,000 units of Alpha and 64,000 units of Beta. Also assume that the company’s raw material available for production is limited to 166,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials? total contribution margin 15. Assume that Cane’s customers would buy a maximum of 84,000 units of Alpha and 64,000 units of Beta. Also assume that the company’s raw material available for production is limited to 166,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials MAX price to be paid per pound

Answer 1

Answer to 5. Assume that Cane expects to produce and sell 99,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 14,000 additional Alphas for a price of $96 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 7,000 units.

a. Calculate the incremental net operating income if this order is accepted?

incremental net operating income	Sale Proceeds of 99000 Alphas = 99000 x $140 = $13860000 Cost of Goods sold = 99000 x $121 = $11979000 Operating Income = $13860000 - $11979000 = $1881000 Sale Proceeds of 14000 Alphas = 14000 x $96 = $1344000 Sale Proceeds of 92000 Alphas = 92000 x $140 = $12880000 Total Sales Proceeds = $1344000 = $12880000 = $14224000 Cost of Goods Sold of 106000 Alphas = $11979000 + (7000 x variable cost per unit i.e.$121-$20-$19) = $11979000 + $574000 = $12553000 Operating Income After New Order = $14224000 - $12553000 = $1671000 Incremental Operating Income = $1671000 - $1881000 = -$21000 Hence there is a decrease in net operating income by $21000

6.

Assume that Cane normally produces and sells 94,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease? Contribution = Sales - Variable Cost = ($100 - $56) x 94000 = $4136000 Profit DECREASE by: $4136000 7.

Assume that Cane normally produces and sells 44,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease? Contribution = Sales - Variable Cost = ($100 - $56) x 44000 = $1936000 profit DECREASE by $1936000 8. Assume that Cane normally produces and sells 64,000 Betas and 84,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 19,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease? Contribution = Sales - Variable Cost Alpha Beta    =($140 - $82) x 19000   = ($100 - $56) x 64000 = $1102000 = $2816000 Profit DECREASE by $ $2816000 - $1102000 = $1714000    9. Assume that Cane expects to produce and sell 84,000 Alphas during the current year. A supplier has offered to manufacture and deliver 84,000 Alphas to Cane for a price of $96 per unit. If Cane buys 84,000 units from the supplier instead of making those units, how much will profits increase or decrease? Profit DECREASE by ($96 - $82) x 84000 = $1176000    10. Assume that Cane expects to produce and sell 54,000 Alphas during the current year. A supplier has offered to manufacture and deliver 54,000 Alphas to Cane for a price of $96 per unit. If Cane buys 54,000 units from the supplier instead of making those units, how much will profits increase or decrease? profit DECREASE by ($96 - $82) x 54000 = $756000 11. How many pounds of raw material are needed to make one unit of Alpha and one unit of Beta? pounds of raw material per unit alpha    beta    Raw Material Required $32/ $8 $16/$8 = 4 pounds = 2 pounds 12. What contribution margin per pound of raw material is earned by Alpha and Beta? contribution margin per pound alpha    Beta    Sales - Variable Cost $140 - $82 $100 - $56 = $58 =$44 13.Assume that Cane’s customers would buy a maximum of 84,000 units of Alpha and 64,000 units of Beta. Also assume that the company’s raw material available for production is limited to 166,000 pounds. How many units of each product should Cane produce to maximize its profits? units produced alpha beta Contribution per unit $58 $44 Raw Material consumption per unit 4 pounds 2 pounds Contribution per key factor $14.50 $22 Raw Material consumption for Beta = 64000 x2 = 128000 pounds Balance to be usd for Alpha = 166000 - 128000 = 38000 units produced alpha 38000/4 = 9500 units beta 128000/2 = 64000 units 14. Assume that Cane’s customers would buy a maximum of 84,000 units of Alpha and 64,000 units of Beta. Also assume that the company’s raw material available for production is limited to 166,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials? Contribution for Alpha = 9500 x $58 = $551000 Cpntribution for Beta = 64000 x $44 = $2816000 total contribution margin $2816000 + $551000 = $3367000 15. Assume that Cane’s customers would buy a maximum of 84,000 units of Alpha and 64,000 units of Beta. Also assume that the company’s raw material available for production is limited to 166,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials Additonal Raw material required = (84000 - 9500) x 4 = 298000 pounds MAX price to be paid per pound    $8 + ($140-$121) = $27 per pound for additional raw material to recover its fixed overheads