Question

Cane Company manufactures two products called Alpha and Beta that sell for $115 and $85 respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 100,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha	Beta
Direct Materials	30	12
Direct Labor	20	15
Variable manufacturing overhead	7	5
Traceable fixed manufacturing overhead	15	14
Variable selling expenses	12	8
Common fixed expenses	15	10
Total cost per unit	99	64

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 90,000 Betas per year. If Cane discontinues the Beta product line, how much will profit increase or decrease?

7. Assume that Cane normally produces and sells 40,000 Betas per year. If Cane discontinues the Beta product line, how much will profit increase or decrease?

8. Assume that Cane normally produces and sells 60,000 Betas and 80,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 15,000 units. If Cane discontinues the Beta product line, how much would profit increase or decrease?

9. Assume that Cane expects to produce and sell 80,000 Alphas during the current year. A supplier has offered to manufacture and deliver 80,000 Alphas to Cane for a price of $80 per unit. If Cane buys 80,000 units from the supplier instead of making those units, how much will profit increase or decrease?

10. Assume that Cane expects to produce and sell 50,000 Alphas during the current year. A supplier has offered to manufacture and deliver 50,000 Alphas to Cane for a price of $80 per unit. If Cane buys 50,000 from the supplier instead of making those units, how much will profit increase or decrease?

11. How many pounds of raw material are needed to make one unit of Alpha and one unit of Beta?

12. What contribution margin per pound of raw material is earned by Alpha and Beta?

13. Assume that Cane’s customers would buy a maximum of 80,000 units of Alpha and 60,000 units of Beta. Also assume that the company’s raw material available for production is limited to 160,000 pounds. How many units of each product should Cane produce to maximize its profits?

14. If Cane follows your recommendation in requirement 13, what total contribution margin will it earn?

Answer 1