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 8. Assume that Cane normally produces and sells 73,000 Betas and 93,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 13,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease? profit increase or decrease by? 9. Assume that Cane expects to produce and sell 93,000 Alphas during the current year. A supplier has offered to manufacture and deliver 93,000 Alphas to Cane for a price of $132 per unit. If Cane buys 93,000 units from the supplier instead of making those units, how much will profits increase or decrease? profit increase or decrease by? 10. Assume that Cane expects to produce and sell 68,000 Alphas during the current year. A supplier has offered to manufacture and deliver 68,000 Alphas to Cane for a price of $132 per unit. If Cane buys 68,000 units from the supplier instead of making those units, how much will profits increase or decrease? profit increase or decrease by?

Answer 1

Given Information.

	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
	As Traceble Fixed Mfg. Overhead is avoidable, revised cost per unit are as under
	Less Traceable Fixed Mfg Overhead			28				31
	Revised Cost Per Unit			146				114
A				Current Scenrio
				Alpha	Beta
	Units			93000	73000
	Revised cost per unit			146	114
	Selling Price			185	150
	Profit Per unit			39	36
	Total Profit			3627000	2628000	6255000
	If sales of Beta discontinued and sales of Alpha increased by 13000 units
				Current
				Alpha	Beta
	Units	93000+13000		106000	0
1	Selling Price			185
2	Variable Cost
	Direct materials	40
	Direct labor	33
	Variable manufacturing overhead	20
	Traceable fixed manufacturing overhead	0
	Variable selling expenses	25
	Total Variable Cost			118
3	Contribution Margin (1-3)			67
	Total Variable Cost			7102000
	Total Fixed Common Expenses			4283000
	Total Profit			2819000
	Profit as per current scenrio			6255000
	Profit if Beta discontinued and Alpha sales increase by 13000			2819000
	So profit will decrease by			3436000
9	If Cane produces and sells 93000 units
				Alpha
	Units			93000
1	Selling Price			185
	Total Sales			17205000
2	Variable Cost
	Direct materials	40
	Direct labor	33
	Variable manufacturing overhead	20
	Traceable fixed manufacturing overhead	0
	Variable selling expenses	25
	Total Variable Cost			118
3	Contribution Margin (1-3)			67
	Total Variable Cost			6231000
	Total Fixed Common Expenses			4283000	(refer to working notes)
	Total Cost			1948000
	If company buys units 93000
	Selling Price	=185*93000		17205000
	Buying Alpha 93000 units	132 *93000		12276000
				4929000
	Differential Incremental Profit			2981000
	Assumption
	Company is not producing any units of Beta and Fixed cost is not considered in calculation
9	If Cane produces and sells 68000 units
				Alpha
	Units			68000
1	Selling Price			185
	Total Sales			12580000
2	Variable Cost
	Direct materials	40
	Direct labor	33
	Variable manufacturing overhead	20
	Traceable fixed manufacturing overhead	0
	Variable selling expenses	25
	Total Variable Cost			118
3	Contribution Margin (1-3)			67
	Total Variable Cost			4556000
	Total Fixed Common Expenses			4283000	(refer to working notes)
	Total Cost			273000
	If company buys units 93000
	Selling Price	=185*68000		12580000
	Buying Alpha 93000 units	132 *93000		8976000
				3604000
	Differential Incremental Profit			3331000
	Assumption
	Company is not producing any units of Beta and Fixed cost is not considered in calculation
	Working Notes - Calculation of Total Fixed Common Expenses
a	Per unit Common Fixed Common Expenses	28	23
b	Sales units	93000	73000
c	Selling Price	185	150
d	Total Sales (c*b)	17205000	10950000	28155000
e	Allocated Common Fixed Costs (a*b)	2604000	1679000	4283000
	Total Fixed Common Expenses	4283000