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.

5. Assume that Cane expects to produce and sell 114,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 29,000 additional Alphas for a price of $156 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 13,000 units.

a. 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?

Answer 1

Answer 5.
Statement of Incremental Profit
If order is Accepted of Alpha - 29,000 Units
Particulars		Amount
Increase in Sales (29,000 Units X $156)		4,524,000
Less: Increase in Costs
Variable Cost
Direct Material (29,000 Units X $42)	(1,218,000)
Direct Labour (29,000 Units X $42)	(1,218,000)
Variable MOH (29,000 Units X $26)	(754,000)
Variable Selling Exp. (29,000 Units X $31)	(899,000)
Loss of Contribution to Normal Customers -13,000 X $84	(1,092,000)	(5,181,000)
Incremental Profit / (Loss)		(657,000)
Contrbution per Unit = $225 - ($42+$42+$26+$31) = $84
Net Income will decrease by $657,000, if order is accepted.
Answer 6.
Statement of Incremental Profit
If Beta is Discontinued - 109,000 Units
Particulars		Amount
Incremental Revenue - savings in Costs
Direct Material (109,000 Units X $24)	2,616,000
Direct Labour (109,000 Units X $32)	3,488,000
Variable MOH (109,000 Units X $24)	2,616,000
Variable Selling Exp. (109,000 Units X $27)	2,943,000
Traceable Fixed Manf. Costs - 130,000 Units X $37	4,810,000	16,473,000
Incremental Cost
Loss of Sales Revenue - 109,000 Units X $175		(19,075,000)
Incremental Profit / (Loss)		(2,602,000)
Answer 7.
Statement of Incremental Profit
If Beta is Discontinued - 59,000 Units
Particulars		Amount
Incremental Revenue - savings in Costs
Direct Material (59,000 Units X $24)	1,416,000
Direct Labour (59,000 Units X $32)	1,888,000
Variable MOH (59,000 Units X $24)	1,416,000
Variable Selling Exp. (59,000 Units X $27)	1,593,000
Traceable Fixed Manf. Costs - 130,000 Units X $37	4,810,000	11,123,000
Incremental Cost
Loss of Sales Revenue - 59,000 Units X $175		(10,325,000)
Incremental Profit / (Loss)		798,000