Question

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Cane Company manufactures two products called Alpha and Beta that sell for $210 and $172, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 128,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	40			$	24
Direct labor			38				34
Variable manufacturing overhead			25				23
Traceable fixed manufacturing overhead			33				36
Variable selling expenses			30				26
Common fixed expenses			33				28
Total cost per unit		$	199			$	171

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.

1.Assume that Cane normally produces and sells 108,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

2.Assume that Cane normally produces and sells 58,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

3.Assume that Cane normally produces and sells 78,000 Betas and 98,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 11,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?

4.Assume that Cane expects to produce and sell 73,000 Alphas during the current year. A supplier has offered to manufacture and deliver 73,000 Alphas to Cane for a price of $152 per unit. If Cane buys 73,000 units from the supplier instead of making those units, how much will profits increase or decrease?

5.How many pounds of raw material are needed to make one unit of Alpha and one unit of Beta?

6.

What contribution margin per pound of raw material is earned by Alpha and Beta

7.Assume that Cane’s customers would buy a maximum of 98,000 units of Alpha and 78,000 units of Beta. Also assume that the company’s raw material available for production is limited to 248,000 pounds. How many units of each product should Cane produce to maximize its profits

Answer 1

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1.Assume that Cane normally produces and sells 108,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?
Contribution Lost if Beta Product Line closed	65 Per unit
(172-24-34-23-26)
Contribution Lost of 108000 Units	-7020000
Less: Traceable Fixed Manufacturin Overhead	4608000
(36*128000)
Decrease in profit if Beta is dropped	-2412000
2.Assume that Cane normally produces and sells 58,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?
Contribution Lost of 58000 Units	-3770000
Less: Traceable Fixed Manufacturin Overhead	4608000
(36*128000)
Increase in profit if Beta is dropped	838000
3.Assume that Cane normally produces and sells 78,000 Betas and 98,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 11,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?
Contribution Lost of 78000 Units	-5070000
Less: Traceable Fixed Manufacturin Overhead	4608000
Add: Additional Contribution from Sale of Alpha	847000
11000*(210-40-38-25-30)
Increase in profit if Beta is dropped	385000
4.Assume that Cane expects to produce and sell 73,000 Alphas during the current year. A supplier has offered to manufacture and deliver 73,000 Alphas to Cane for a price of $152 per unit. If Cane buys 73,000 units from the supplier instead of making those units, how much will profits increase or decrease?
	Make	Buy
Cost of purchasing 73000*152		11096000
Direct Material 73000*40	2920000
Direct Labor 73000*38	2774000
Variable Overhead 73000*25	1825000
Traceable Fixed Overhead 128000*33	4224000
Total Cost	11743000	11096000
Profit will increase by 11743000-11096000=$647000
5.How many pounds of raw material are needed to make one unit of Alpha and one unit of Beta?
	Alpha	Beta
Direct Material Cost	40	24
Cost per pound	8	8
Pound material needed for one unit	5	3
(Direct Material Cost/Cost per pound)
6. What contribution margin per pound of raw material is earned by Alpha and Beta
	Alpha	Beta
Contribution Margin per unit	77	65
Pound material needed for one unit	5	3
Contribution Margin per pound of RM	15.4	21.7
7.Assume that Cane’s customers would buy a maximum of 98,000 units of Alpha and 78,000 units of Beta. Also assume that the company’s raw material available for production is limited to 248,000 pounds. How many units of each product should Cane produce to maximize its profits
Since Contribution Margin per pound of RM for Beta is more, should produce Beta maximum.
	Material per unit	Units Produced	Total Pounds
Beta	3	78000	234000
Alpha	5	2800	14000	(248000-234000)
		(14000/5)