Question

Cane Company manufactures two products called Alpha and Beta that sell for $120 and $80, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 100,000 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			$	12
Direct labor			20				15
Variable manufacturing overhead			7				5
Traceable fixed manufacturing overhead			16				18
Variable selling expenses			12				8
Common fixed expenses			15				10
Total cost per unit		$	100			$	68

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.

Foundational 11-4

4. Assume that Cane expects to produce and sell 90,000 Betas during the current year. One of Cane’s sales representatives has found a new customer who is willing to buy 5,000 additional Betas for a price of $39 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

5. Assume that Cane expects to produce and sell 95,000 Alphas during the current year. One of Cane’s sales representatives has found a new customer who is willing to buy 10,000 additional Alphas for a price of $80 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 5,000 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?

7. Assume that Cane normally produces and sells 40,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

8. Assume that Cane normally produces and sells 60,000 Betas and 80,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 15,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

9. Assume that Cane expects to produce and sell 80,000 Alphas during the current year. A supplier has offered to manufacture and deliver 80,000 Alphas to Cane for a price of $80 per unit. What is the financial advantage (disadvantage) of buying 80,000 units from the supplier instead of making those units?

10. Assume that Cane expects to produce and sell 50,000 Alphas during the current year. A supplier has offered to manufacture and deliver 50,000 Alphas to Cane for a price of $80 per unit. What is the financial advantage (disadvantage) of buying 50,000 units from the supplier instead of making those units?

11. How many pounds of raw material are needed to make one unit of each of the two products?

13. Assume that Cane’s customers would buy a maximum of 80,000 units of Alpha and 60,000 units of Beta. Also assume that the raw material available for production is limited to 160,000 pounds. How many units of each product should Cane produce to maximize its profits?

14. Assume that Cane’s customers would buy a maximum of 80,000 units of Alpha and 60,000 units of Beta. Also assume that the raw material available for production is limited to 160,000 pounds. What total contribution margin will it earn?

15. Assume that Cane’s customers would buy a maximum of 80,000 units of Alpha and 60,000 units of Beta. Also assume that the raw material available for production is limited to 160,000 pounds. If Cane uses its 160,000 pounds of raw materials, up to how much should it be willing to pay per pound for additional raw materials?

Answer 1

1.Traceable Overhead

Alpha = 16*100,000 = $1,600,000

Beta = 18*100,000 = $1,800,000

2.Common expenses = (15+10)*100,000 = $2,500,000

4.Fixed costs are not relevant as it will not increase

Financial Advantage = (39-12-15-5-8)*5,000

= $(5,000)

I.e. disadvantage

5.a.Financial advantage = Advantage on new order – contribution margin lost on regular sales

= 110,000 – 5,000*(120-30-20-7-12)

= $(145,000)

I.e. disadvantage

b.No

7.Financial Advantage of discontinuing product line = Fixed costs avoided – contribution margin lost

= 1,800,000 – 40,000*(80-12-15-5-8)

= $200,000

advantage

8.Financial Advantage = 1,800,000 – 60,000*40 + 80,000*(120-30-20-7-12)

= $3,480,000

9.Financial Advantage of buying = 1,600,000 + 80,000*(30+20+7) – 80,000*80

= $(240,000)

10. Financial Advantage of buying = 1,600,000 + 50,000*57 –50,000*80

= $450,000

11.Raw material required = cost of raw material per unit/cost per pound

Alpha = 30/6 = 5 pounds

Beta =12/6 = 2 pounds

12.Contribution Margin per pound

Alpha = 51/5 = $10.2

Beta = 40/2 = $20

13.Should produce beta first

Beta = 80,000 units

Alpha = 0 units

14.Total CM = 80,000*40 = $3,200,000

15.Max price to be paid = $6 + $10.2

= $16.2