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. Questions: 1. 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. a. Calculate the incremental net operating income if the order is accepted? (Loss amount should be indicated with a minus sign.) b. Based on your calculations above should the special order be accepted? 2. 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? 3.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? 4. 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? 5. 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? 6. 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 1

	1	Quantity of Alpha to produce and sell	103000
		Annual production capacity	112000
		Variable costs per unit:
		Direct material	$30
		Direct labor	$22
		Variable manufacturing overhead	$20
		Variable selling expense	$20
		Total variable expenses	$92
		Selling price per unit	$185
		Contribution per unit	$93	(185-92)
		Total contribution margin for 103000units	$9,579,000
	a)	If the order is accepted:
		Contribution from (112000-18000)=94000units	$8,742,000	(94000*$93)
		Contribution per unit for balance units=(112-93)	$19
		Contribution from 18000 units of sales	$342,000	(18000*19)
		Total contribution from 112000 units of sales	$9,084,000	(8742000+342000)
		Incremental net operating Income	($495,000)	(9084000-9579000)
	b)	Based on the calculation above the special order should not be accepted
	2	Quantity of production and sell of Beta	98000
		Variable costs per unit:
		Direct material	$10
		Direct labor	$29
		Variable manufacturing overhead	$13
		Variable selling expense	$16
		Total variable expenses	$68
		Selling price per unit	$120
		Contribution per unit	$52	(120-680
		Total contribution margin for 98000units	$5,096,000	(98000*52)
		Fixed costs:
		Traceable Fixed Manufacturing Overhead	$          2,912,000	(112000*26)
		Common Fixed Expenses	$          2,016,000	(112000*18)
		Total fixed costs	$          4,928,000	(2912000+2016000)
		Net income	$168,000	(5096000-4928000)
		If product is discontinued:
		Sells	$0
		Costs:
		Fixed expenses not avoidable(common fixed expenses)	$          2,016,000
		Net income	($2,016,000)
		Decrease in profit=(168000+2016000)	$2,184,000
	3	Quantity of production and sell of Beta	48000
		Contribution per unit	$52
		Total contribution margin for 48000units	$2,496,000	(48000*52)
		Fixed costs:
		Traceable Fixed Manufacturing Overhead	$          2,912,000	(112000*26)
		Common Fixed Expenses	$          2,016,000	(112000*18)
		Total fixed costs	$          4,928,000	(2912000+2016000)
		Net income	($2,432,000)	(2496000-4928000)
		If product is discontinued:
		Sells	$0
		Costs:
		Fixed expenses not avoidable(common fixed expenses)	$          2,016,000
		Net income	($2,016,000)
		Increasein profit=(2432000-2016000)	$416,000	(Decrease in loss)
	4	Quantity of production and sell of Beta	68000
		Contribution per unit	$52
		Total contribution margin for 48000units	$3,536,000	(68000*52)
		Fixed costs:
		Traceable Fixed Manufacturing Overhead	$          2,912,000	(112000*26)
		Common Fixed Expenses	$          2,016,000	(112000*18)
		Total fixed costs	$          4,928,000	(2912000+2016000)
		Net income	($1,392,000)	(3536000-4928000)
		If product is discontinued:
		Sells	$0
		Costs:
		Fixed expenses not avoidable(common fixed expenses)	$          2,016,000
		Net income	($2,016,000)
		Decrease in profit=(2016000-1392000)	$624,000	(Increase in loss)
		Increase of sales of Alpha in units	12000
		Additional contribution margin(93*12000)	$1,116,000
		Increase in profit from sales of alpha	$1,116,000
		Net income after addition profit from Alpha	($900,000)	(1116000-2016000)
		Decrease in loss(Increase in profit)	$492,000	(1392000-900000)
	5	Variable cost of manufacturing 88000units of Alpha	$8,096,000	(92*88000)
		Fixed cost of manufacturing 88000 units of alpha	$          5,264,000	(112000*(24+23)
		Total cost of manufacturing 88000 units of alpha	$13,360,000	(8096000+5264000)
		Selling Price(185*88000)	$16,280,000
		Net Profit(16280000-13360000)	$2,920,000
		Purchasing cost of 88000 units(112*88000)	$          9,856,000
		Net Profit(16280000-9856000)	$6,424,000
		Increase in profit(6424000-2920000)	$3,504,000
	6	Variable cost of manufacturing 58000units of Alpha	$5,336,000	(92*58000)
		Fixed cost of manufacturing 58000 units of alpha	$          5,264,000	(112000*(24+23)
		Total cost of manufacturing 58000 units of alpha	$10,600,000	(5336000+5264000)
		Selling Price(185*58000)	$10,730,000
		Net Profit(10730000-10600000)	$130,000
		Purchasing cost of 58000 units(112*58000)	$          6,496,000
		Net Profit(10730000-6496000)	$4,234,000
		Increase in profit(4234000-130000)	$4,104,000