Question

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Cane Company manufactures two products called Alpha and Beta that sell for $185 and $150, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 119,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	40			$	24
Direct labor			33				28
Variable manufacturing overhead			20				18
Traceable fixed manufacturing overhead			28				31
Variable selling expenses			25				21
Common fixed expenses			28				23
Total cost per unit		$	174			$	145

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 108,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 23,000 additional Alphas for a price of $132 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 12,000 units.

a.

Calculate the incremental net operating income if the order is accepted? (Loss amount should be indicated with a minus sign.) Inceremental net operating income? b. Based on your calculations above should the special order be accepted? Yes or No 6. Assume that Cane normally produces and sells 103,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease? profit increase or decrease by 7. Assume that Cane normally produces and sells 53,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease? profit increase or decrease by

           

Answer 1

Part 5 - a

Incremental revenue (23000*132) (a)		3036000
Incremental variable costs :
Direct materials (11000*40)	440000
Direct labor (11000*33)	363000
Variable manufacturing overhead (11000*20)	220000
Variable selling expenses (11000*25)	275000
Total incremental variable costs (b)		1298000
Forgone sales to regular customers (12000*185) (c)		2220000
Incremental net operating income (a-b-c)		(482000)

Part 5-B

Based on your calculations above should the special order be accepted? No, because it gives negative net operating income.

Part 6

The profit impact of dropping the Beta product line is computed as follows :

Contribution margin if beta product line is dropped (103000*(150-24-28-18-21))	(6077000)
Traceable fixed manufacturing costs (119000*31)	3689000
Decrease in net operating income if beta is dropped	(3082000)

Profit decrease by 3082000

Part 7

The profit impact of dropping the Beta product line is computed as follows :

Contribution margin if product line is dropped (53000*(150-24-28-18-21))	(3127000)
Traceable fixed manufacturing overhead (119000*31)	3689000
Increase in net operating income if beta is dropped	562,000

Profit increases by 562000