Question

Cane Company manufactures two products called Alpha and Beta that sell for $150 and $110, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 108,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	30			$	15
Direct labor			26				22
Variable manufacturing overhead			13				11
Traceable fixed manufacturing overhead			22				24
Variable selling expenses			18				14
Common fixed expenses			21				16
Total cost per unit		$	130			$	102

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 101,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 16,000 additional Alphas for a price of $104 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 9,000 units.

a. What is the financial advantage (disadvantage) of accepting the new customer’s order?

b. Based on your calculations above should the special order be accepted?

6. Assume that Cane normally produces and sells 96,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

7. Assume that Cane normally produces and sells 46,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

8. Assume that Cane normally produces and sells 66,000 Betas and 86,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 12,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

9. Assume that Cane expects to produce and sell 86,000 Alphas during the current year. A supplier has offered to manufacture and deliver 86,000 Alphas to Cane for a price of $104 per unit. What is the financial advantage (disadvantage) of buying 86,000 units from the supplier instead of making those units?

10. Assume that Cane expects to produce and sell 56,000 Alphas during the current year. A supplier has offered to manufacture and deliver 56,000 Alphas to Cane for a price of $104 per unit. What is the financial advantage (disadvantage) of buying 56,000 units from the supplier instead of making those units?

Answer 1

5. Assume that Cane expects to produce and sell 101,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 16,000 additional Alphas for a price of $104 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 9,000 units.

(a)

Increase in Revenue (7000 * $104)	$728000
Less: Contribution lost (9000 * $46)	$414000
Financial Advantage	$314000

(b)Yes special order should be accepted

6. Assume that Cane normally produces and sells 96,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

Variable cost [96000 * ($15+$22+$11+$14)	$5952000
Traceable Fixed mfr OH ($24 * 108000)	$2592000
Less: Sale (96000 * $110)	$10560000
Financial (disadvantage) of discontinuing	$2016000

7. Assume that Cane normally produces and sells 46,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

Variable cost [46000 * ($15+$22+$11+$14)	$2852000
Traceable Fixed mfr OH ($24 * 108000)	$2592000
Less: Sale (46000 * $110)	$5060000
Financial advantage of discontinuing	$384000

8. Assume that Cane normally produces and sells 66,000 Betas and 86,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 12,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

Sale (66000 * $110)	$7260000
Less: Variable cost [66000 * ($15+$22+$11+$14)	$4092000
Less: Traceable Fixed mfr OH ($24 * 108000)	$2592000
Profit from Beta (a)	$576000
Profit from Alpha (b)	$756000
Financial advantage of discontinuing (b-a)	$180000

Profit from Alpha = 12000 units * ($150 - $30 - $26 - $13 - $18) = $756000

9. Assume that Cane expects to produce and sell 86,000 Alphas during the current year. A supplier has offered to manufacture and deliver 86,000 Alphas to Cane for a price of $104 per unit. What is the financial advantage (disadvantage) of buying 86,000 units from the supplier instead of making those units?

Variable cost for making alpha = Units * (DM + DL + Variable mfr OH) + Traceable fixed mfr OH

                 = 86000 * ($30 + $26 + $13) + (108000 * $22)

                        = $5934000 + $2376000 = $8310000

Buying cost = $104 * 86000 = $8944000

Financial advantage (disadvantage) = $8310000 - $8944000 = ($634000)

10. Assume that Cane expects to produce and sell 56,000 Alphas during the current year. A supplier has offered to manufacture and deliver 56,000 Alphas to Cane for a price of $104 per unit. What is the financial advantage (disadvantage) of buying 56,000 units from the supplier instead of making those units?

Variable cost for making alpha = Units * (DM + DL + Variable mfr OH) + Traceable fixed mfr OH

                 = 56000 * ($30 + $26 + $13) + (108000 * $22)

                        = $3864000 + $2376000 = $6240000

Buying cost = $104 * 56000 = $5824000

Financial advantage (disadvantage) = $6240000 - $5824000 = $416000