Question

Cane Company manufactures two products called Alpha and Beta that sell for $185 and $120, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 112,000 units of each product. Its unit costs for each product at this level of activity are given below: Alpha Beta Direct materials $ 30 $ 10 Direct labor 22 29 Variable manufacturing overhead 20 13 Traceable fixed manufacturing overhead 24 26 Variable selling expenses 20 16 Common fixed expenses 23 18 Total cost per unit $ 139 $ 112 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 103,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 18,000 additional Alphas for a price of $112 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 9,000 units.

ANSWER: Net operating income__________ by ___________

a. Calculate the incremental net operating income if the order is accepted? (Loss amount should be indicated with a minus sign.) .

ANSWER: incremental net operating income __________________

B. Based on your calculations above should the special order be accepted? Yes No

6. Assume that Cane normally produces and sells 98,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

ANSWER: Profit __________ by ___________

7. Assume that Cane normally produces and sells 48,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

ANSWER: Profit __________ by ___________

8. Assume that Cane normally produces and sells 68,000 Betas and 88,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 12,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?

ANSWER: Profit __________ by ___________

9. Assume that Cane expects to produce and sell 88,000 Alphas during the current year. A supplier has offered to manufacture and deliver 88,000 Alphas to Cane for a price of $112 per unit. If Cane buys 88,000 units from the supplier instead of making those units, how much will profits increase or decrease?

ANSWER: Profit __________ by ___________

10. Assume that Cane expects to produce and sell 58,000 Alphas during the current year. A supplier has offered to manufacture and deliver 58,000 Alphas to Cane for a price of $112 per unit. If Cane buys 58,000 units from the supplier instead of making those units, how much will profits increase or decrease?

ANSWER: Profit __________ by ___________

Answer 1

	Cane Company
	Basic Calculations
	Units	Alpha		beta
		Amount	Per unit	Amount	Per unit
	Variable costing Income statement
	Revenue		185
	Variable cost
	Direct Materials		30		10
	Direct Labor		22		29
	Variable overhead		20		13
	Variable selling expenses		20		16
	Total variable costs		92		68
	Contribution margin		93
	Fixed costs
	Traceble fixed manufacturing overhead		24		26
	Common fixed costs		23		18
	Total fixed costs
	Operating Income
Requirement 5
	Additional contribution from sale of 18000 units to new customer				360000	=18000*(112-92)
	Opportunity cost of not earning contribution on 9000 units				837000	=9000*(185-92)
	Incremental Profit				-477000
Thus,	Net operating Income decrease by	477000
Requirement 5a)
	Incremental net operating Income	-477000
Requirement 5B)
Based on above calculations, Special order should not be accepted
Requirement 6
	Units			98000
				beta
				Amount	Per unit
	Variable costing Income statement
	Revenue			11760000	120
	Variable cost
	Direct Materials			980000	10
	Direct Labor			2842000	29
	Variable overhead			1274000	13
	Variable selling expenses			1568000	16
	Total variable costs			6664000	68
	Contribution margin			5096000	52
	Fixed costs
	Traceble fixed manufacturing overhead			2912000	26
	Common fixed costs
	Total fixed costs			2912000
	Operating Income			2184000
	If Can discontinue the Beta product line,
	Profit will decrease by	2184000
Requirement 7
	Units			48000
				beta
				Amount	Per unit
	Variable costing Income statement
	Revenue			5760000	120
	Variable cost
	Direct Materials			480000	10
	Direct Labor			1392000	29
	Variable overhead			624000	13
	Variable selling expenses			768000	16
	Total variable costs			3264000	68
	Contribution margin			2496000	52
	Fixed costs
	Traceble fixed manufacturing overhead			2912000	26
	Common fixed costs
	Total fixed costs			2912000
	Operating Income			-416000
	If Can discontinue the Beta product line,
	Profit will increase by	416000
Requirement 8
	Total relevent revenue from producing and selling 68000 betas
	Units			68000
				beta
				Amount	Per unit
	Variable costing Income statement			8160000	120
	Revenue
	Variable cost
	Direct Materials			680000	10
	Direct Labor			1972000	29
	Variable overhead			884000	13
	Variable selling expenses			1088000	16
	Total variable costs			4624000	68
	Contribution margin			3536000	52
	Fixed costs
	Traceble fixed manufacturing overhead			2912000	26
	Common fixed costs
	Total fixed costs			2912000
	Operating Income/Relevent contribution of beta to be lost if discontinued			624000
	Analysis of decision for requirement 8
	Additional revenue from selling additional units of Alpha			1116000	=12000*93
	Opportunity cost of not earning contribution on 68000 Beta units			624000
	Net Additional contribution			492000
	Profit will increase by	492000
Requirement 9 Units 88000 Alpha Amount Per unit Variable costing Income statement Revenue 16280000 185 Variable cost Direct Materials 2640000 30 Direct Labor 1936000 22 Variable overhead 1760000 20 Variable selling expenses 1760000 20 Total variable costs 8096000 92 Fixed costs Traceble fixed manufacturing overhead 2688000 24 Common fixed costs Total fixed costs 2688000 Total cost(Variable+Fixed) 10784000 Total cost if bought from supplier 11616000 Difference/Saving in costs -832000 Profit will decrease by 832000 Requirement 10 Units 58000 Alpha Amount Per unit Variable costing Income statement Revenue 10730000 185 Variable cost Direct Materials 1740000 30 Direct Labor 1276000 22 Variable overhead 1160000 20 Variable selling expenses 1160000 20 Total variable costs 5336000 92 Fixed costs Traceble fixed manufacturing overhead 2688000 24 Common fixed costs Total fixed costs 2688000 Total cost(Variable+Fixed) 8024000 Total cost if bought from supplier 7656000 Difference/Saving in costs 368000 Profit will increase by 368000