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 unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	30			$	12
Direct labour			20				15
Variable manufacturing overhead			7				5
Traceable fixed manufacturing overhead			16				18
Variable selling expenses			12				8
Common fixed expenses			15				10
Cost per unit		$	100			$	68

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.

6. Assume that Cane normally produces and sells 90,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

7. Assume that Cane normally produces and sells 40,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

8. Assume that Cane normally produces and sells 40,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

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. If Cane buys 80,000 units from the supplier instead of making those units, how much will profits increase or decrease?

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. If Cane buys 50,000 units from the supplier instead of making those units, how much will profits increase or decrease?

answer all the question

Answer 1

6). Segment margin of Beta
Selling price = $80
Less: Relevant costs:
Direct material = $12
Direct labor = $15
Variable manufacturing overhead = $5
Traceable fixed manufacturing overhead = $18
Variable selling expenses = $8
Segment margin = $22

If Cane discontinues the Beta product line, profits will decrease by $1,980,000 i.e. (90,000 * $22)

7). If Cane discontinues the Beta product line, profits will decrease by $880,000 i.e. (40,000 * $22)

8). Same as in 7).

9). If Cane buys 80,000 units from the supplier instead of making those units:
Relevant cost savings:
Direct material = $30
Direct labor = $20
Variable manufacturing overhead = $7
Traceable fixed manufacturing overhead = $16
Variable selling expenses = $12
Total cost savings per unit = $85
Less: Purchase cost from outside = $80
Net increase or (decrease) in profits ($85 - $80) = $5

Profits increase or (decrease) ($5 * 80,000) = $400,000

10). If Cane buys 50,000 units from the supplier instead of making those units
Profits increase or (decrease) ($5 * 50,000) = $250,000