Question

Cane Company manufactures two products called Alpha and Beta that sell for $240 and $162, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 131,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	35			$	15
Direct labor			48				23
Variable manufacturing overhead			27				25
Traceable fixed manufacturing overhead			35				38
Variable selling expenses			32				28
Common fixed expenses			35				30
Total cost per unit		$	212			$	159

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.

10. Assume that Cane expects to produce and sell 75,000 Alphas during the current year. A supplier has offered to manufacture and deliver 75,000 Alphas to Cane for a price of $160 per unit. What is the financial advantage (disadvantage) of buying 75,000 units from the supplier instead of making those units?

8. Assume that Cane normally produces and sells 80,000 Betas and 100,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 13,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

12. What contribution margin per pound of raw material is earned by each of the two products? (Round your answers to 2 decimal places.)

13. Assume that Cane’s customers would buy a maximum of 100,000 units of Alpha and 80,000 units of Beta. Also assume that the raw material available for production is limited to 261,000 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 100,000 units of Alpha and 80,000 units of Beta. Also assume that the raw material available for production is limited to 261,000 pounds. What total contribution margin will it earn?

Answer 1

Ans 10
	in $
Buying Alpha (75000*160)	-12000000
Less: saving in cost
Variable manufacturing cost (110*75000)	8250000
Fixed manufacturing overhead (35*131000)	4585000
Net Financial advantage of buying	835000	answer
working
Alpha
Direct materials	35	$
Direct labor	48
Variable manufacturing overhead	27
Total variable cost	110
Traceable fixed manufacturing overhead	35
ans 8
Increase in contribution due to sale of Beta	1287000
13000*(240-110-31)
Add: Saving intraceable fixed manufacturing cost of Beta	4978000
(131000*38)
Less: Contribution margin lost on Beta sales	-5680000
80000*(162-15-23-25-28)
finnacial advantage of discontinuing Beta	585000	answer
ans 12
	Alpha	Beta
Sales price	$240	162
Less: Variable expenses
Direct materials	35	15
Direct labor	48	23
Variable manufacturing overhead	27	25
Variable selling expenses	32	28
Total variable expenses	142	91
Contribution Margin per unit	$98	$71
No. of raw material required	7	3
	(35/5)	(15/5)
Contribution margin per pound	$14.00	$23.67	answer
ans 13
Ranking	2	1
First Beta will use than Alpa
No. of hour used (80000*3)	240000	hours used
Remaining (261000-240000)	31000/3	4428.571
answer	Units to be made
Beta	80000
Alpha	4428	units is rounded
	or 4429
ans 14
If hours taken as 4428
Contribution margin earned	6113944
(80000*71)+(4428*98)
or as 4429
Contribution margin earned	6114042
(80000*71)+(4429*98)