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.

A. 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?

B. 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?

C. 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?

D. 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?

Answer 1

	Alpha	Beta
Sales	$140	$100
Less: variable cost
Direct materials	32	16
Direct labor	24	19
Variable manufacturing overhead	10	9
Variable selling expenses	16	12
Total variable expenses	82	56
Contribution Margin	$58	$44
Traceable fixed manufacturing overhead	20	22
Common fixed expenses	19	14
ans a
Loss on contribution margin by Beta	-4136000
44*94000
Less: avoidable Traceable fixed manufacturing overhead	2332000
(22*106000)
Profit will decrease by	-1804000
ans b
Loss on contribution margin by Beta	-1936000
44*44000
Less: avoidable Traceable fixed manufacturing overhead	2332000
(22*106000)
Profit will increase by	396000
ans c
	Alpha	Beta
Sales	$140	$100
Less: variable cost
Direct materials	32	16
Direct labor	24	19
Variable manufacturing overhead	10	9
Variable selling expenses	16	12
Total variable expenses	82	56
Contribution Margin	$58	$44
No. of pounds required for one unit	4	2
	32/8	16/8
Contribution margin per pound	$14.50	$22.00
Ranking	2	1
First Beta will be produced , raw material required (64000*2)	128000
Than Alpha will be produced but it is short of raw material hence
Additional raw material is required for Alpha hence the
Direct material cost per pound	$8
Contribution margin per pound for Alpha	14.5
Maximum price that can be paid	$22.5	ans
ans 4
First Beta will be produced , raw material required (64000*2)	128000
Alpha production(166000-128000)/4 pounds= 9500
Maximization of profit
ans Units produced
Beta 64000
Alpha 9500