Question

Cane Company manufactures two products called Alpha and Beta that sell for $130 and $90, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 102,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

                                                                                               Alpha      Beta

Direct materials		$	25			$	10
Direct labor			22				21
Variable manufacturing overhead			17				7
Traceable fixed manufacturing overhead			18				20
Variable selling expenses			14				10
Common fixed expenses			17				12
Total cost per unit		$	113			$	80
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. 5. Assume that Cane expects to produce and sell 97,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 12,000 additional Alphas for a price of $88 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 7,000 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? 6. Assume that Cane normally produces and sells 92,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line? 7. Assume that Cane normally produces and sells 42,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line? 8. Assume that Cane normally produces and sells 62,000 Betas and 82,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 17,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line? 9. Assume that Cane expects to produce and sell 82,000 Alphas during the current year. A supplier has offered to manufacture and deliver 82,000 Alphas to Cane for a price of $88 per unit. What is the financial advantage (disadvantage) of buying 82,000 units from the supplier instead of making those units? 10. Assume that Cane expects to produce and sell 52,000 Alphas during the current year. A supplier has offered to manufacture and deliver 52,000 Alphas to Cane for a price of $88 per unit. What is the financial advantage (disadvantage) of buying 52,000 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? 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 82,000 units of Alpha and 62,000 units of Beta. Also assume that the company’s raw material available for production is limited to 162,000 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 82,000 units of Alpha and 62,000 units of Beta. Also assume that the company’s raw material available for production is limited to 162,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials? 15. Assume that Cane’s customers would buy a maximum of 82,000 units of Alpha and 62,000 units of Beta. Also assume that the company’s raw material available for production is limited to 162,000 pounds. If Cane uses its 162,000 pounds of raw materials, up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)

Answer 1

as policy only first four questions will be answered

5(A)

Incremental revenue (12000*88) (A)= 1056000

Incremental variable costs:

DM (7000*25) 175000

DL (7000*22) 154000

Variable manufacturing overhead (7000*17) 119000

Variable selling expenses (7000*14) 98000

Total incremental variable costs (B) (546000)

Foregone sales to regular customers (7000*130) (C) (910000)

Incremental net operating income (A-B-C) (400000) or -400000

5(B) No, the special order should not be accepted as it will result into negative net operating income

6 financial disadvantage = 1864000

Lost contribution (92000*(90-10-21-7-10))   (3864000)

Traceable fixed manufacturing overhead 2000000

Decrease in operating income = 1864000

7. financial advantage = 236000

Lost contribution (42000*(90-10-21-7-10))   (1764000)

Traceable fixed manufacturing overhead 2000000

increase in operating income 236000