Question

Cane Company manufactures two products called Alpha and Beta that sell for $140 and $100, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 106,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	32			$	16
Direct labor			24				19
Variable manufacturing overhead			10				9
Traceable fixed manufacturing overhead			20				22
Variable selling expenses			16				12
Common fixed expenses			19				14
Total cost per unit		$	121			$	92

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.

6a. Assume that Cane normally produces and sells 94,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

6b. Assume that Cane normally produces and sells 44,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

6c. Assume that Cane normally produces and sells 64,000 Betas and 84,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 19,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

6d. Assume that Cane expects to produce and sell 84,000 Alphas during the current year. A supplier has offered to manufacture and deliver 84,000 Alphas to Cane for a price of $96 per unit. What is the financial advantage (disadvantage) of buying 84,000 units from the supplier instead of making those units?

6e. Assume that Cane expects to produce and sell 54,000 Alphas during the current year. A supplier has offered to manufacture and deliver 54,000 Alphas to Cane for a price of $96 per unit. What is the financial advantage (disadvantage) of buying 54,000 units from the supplier instead of making those units?

Answer 1

Solution 6a:

Differential Analysis - Sale Beta (94000 units) (alt 1) or Discontinue Beta (Alt2)
Particulars	Sale Beta (94000 Units) (Alt 1)		Discontinue Beta (Alt 2)		Differential effect on income (Alt 2)
	Details	Amount	Details	Amount
Revenue	94000*$100	$9,400,000.00		$0.00	-$9,400,000.00
Costs:
Direct Material	94000*$16	$1,504,000.00		$0.00	-$1,504,000.00
Direct Labor	94000*$19	$1,786,000.00		$0.00	-$1,786,000.00
Variable manufacturing Overhead	94000*$9	$846,000.00		$0.00	-$846,000.00
Variable Selling Expenses	94000*$12	$1,128,000.00		$0.00	-$1,128,000.00
Traceable Fixed manufacturing overhead	106000*$22	$2,332,000.00		$0.00	-$2,332,000.00
Common fixed expenses	106000*$14	$1,484,000.00	106000*$14	$1,484,000.00	$0.00
Income / (Loss)		$320,000.00		-$1,484,000.00	-$1,804,000.00

Net financial disadvantage of discontinuing Beta = $1,804,000

Solution 6b:

Differential Analysis - Sale Beta (44000 units) (alt 1) or Discontinue Beta (Alt2)
Particulars	Sale Beta (44000 Units) (Alt 1)		Discontinue Beta (Alt 2)		Differential effect on income (Alt 2)
	Details	Amount	Details	Amount
Revenue	44000*$100	$4,400,000.00		$0.00	-$4,400,000.00
Costs:
Direct Material	44000*$16	$704,000.00		$0.00	-$704,000.00
Direct Labor	44000*$19	$836,000.00		$0.00	-$836,000.00
Variable manufacturing Overhead	44000*$9	$396,000.00		$0.00	-$396,000.00
Variable Selling Expenses	44000*$12	$528,000.00		$0.00	-$528,000.00
Traceable Fixed manufacturing overhead	106000*$22	$2,332,000.00		$0.00	-$2,332,000.00
Common fixed expenses	106000*$14	$1,484,000.00	106000*$14	$1,484,000.00	$0.00
Income / (Loss)		-$1,880,000.00		-$1,484,000.00	$396,000.00

Net financial advantage of discontinuing Beta = $396,000

Solution 6c:

Differential Analysis - Sale Alpha (84000 units), Beta (64000 units) (alt 1) or Discontinue Beta & Sale Alpha (103000 units) (Alt2)
Particulars	Sale Alpha (84000 Units), Beta (64000 Units) (Alt 1)		Discontinue Beta & Sale Alpha (103000 Units) (Alt 2)		Differential effect on income (Alt 2)
	Details	Amount	Details	Amount
Revenue	(84000*$140) + (64000*$100)	$18,160,000.00	103000*$140	$14,420,000.00	-$3,740,000.00
Costs:
Direct Material	(84000*$32) + (64000*$16)	$3,712,000.00	103000*$32	$3,296,000.00	-$416,000.00
Direct Labor	(84000*$24) + (64000*$19)	$3,232,000.00	103000*$24	$2,472,000.00	-$760,000.00
Variable manufacturing Overhead	(84000*$10) + (64000*$9)	$1,416,000.00	103000*$10	$1,030,000.00	-$386,000.00
Variable Selling Expenses	(84000*$16) + (64000*$12)	$2,112,000.00	103000*$16	$1,648,000.00	-$464,000.00
Traceable Fixed manufacturing overhead	(106000*$20) + (106000*$22)	$4,452,000.00	106000*$20	$2,120,000.00	-$2,332,000.00
Common fixed expenses	(106000*$19) + (106000*$14)	$3,498,000.00	(106000*$19) + (106000*$14)	$3,498,000.00	$0.00
Income / (Loss)		-$262,000.00		$356,000.00	$618,000.00

Net financial advantage = $618,000

Solution 6d:

Differential Analysis- Cane Company - Making Alpha (alt 1) or Buying Alpha (Alt2)
Particulars	Making Alpha (Alt 1)	Buying Alpha (Alt 2)	Financial advantage (Disadvantage) of buying (Alternative 2)
Costs:
Purchase Price (84000*$96)	$0.00	$8,064,000.00	-$8,064,000.00
Direct material	$2,688,000.00	$0.00	$2,688,000.00
Direct Labor	$2,016,000.00	$0.00	$2,016,000.00
Variable mnaufacturing overhead	$840,000.00	$0.00	$840,000.00
Avoidable Fixed manufacturing Overhead	$2,120,000.00	$0.00	$2,120,000.00
Total Cost	$7,664,000.00	$8,064,000.00	-$400,000.00

Net financial disadvantage of buying alpha = $400,000

Solution 6e:

Differential Analysis- Cane Company - Making Alpha (alt 1) or Buying Alpha (Alt2)
Particulars	Making Alpha (Alt 1)	Buying Alpha (Alt 2)	Financial advantage (Disadvantage) of buying (Alternative 2)
Costs:
Purchase Price (54000*$96)	$0.00	$5,184,000.00	-$5,184,000.00
Direct material	$1,728,000.00	$0.00	$1,728,000.00
Direct Labor	$1,296,000.00	$0.00	$1,296,000.00
Variable mnaufacturing overhead	$540,000.00	$0.00	$540,000.00
Avoidable Fixed manufacturing Overhead	$2,120,000.00	$0.00	$2,120,000.00
Total Cost	$5,684,000.00	$5,184,000.00	$500,000.00

Net financial advantage of buying alpha = $500,000