Question

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Cane Company manufactures two products called Alpha and Beta that sell for $185 and $150, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 119,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	40			$	24
Direct labor			33				28
Variable manufacturing overhead			20				18
Traceable fixed manufacturing overhead			28				31
Variable selling expenses			25				21
Common fixed expenses			28				23
Total cost per unit		$	174			$	145

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.

7. Assume that Cane normally produces and sells 53,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

8. Assume that Cane normally produces and sells 73,000 Betas and 93,000 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?

9. Assume that Cane expects to produce and sell 93,000 Alphas during the current year. A supplier has offered to manufacture and deliver 93,000 Alphas to Cane for a price of $132 per unit. What is the financial advantage (disadvantage) of buying 93,000 units from the supplier instead of making those units?

10. Assume that Cane expects to produce and sell 68,000 Alphas during the current year. A supplier has offered to manufacture and deliver 68,000 Alphas to Cane for a price of $132 per unit. What is the financial advantage (disadvantage) of buying 68,000 units from the supplier instead of making those units?

Answer 1

B Beta 31270001 36890001 5620001 А 1 7) 2 Particulars Contribution margin lost if Beta product line is 3 dropped (53000)*(150-24-28-18-21) 4 Less: Avpoidable cost: Tracable fixed manufacturing overhead 5 (119000*31) 6 Financial advantage if Beta is dropped 7 8 8) 9 Particulars Contribution margin lost if beta product line is 10 dropped (73000)*(150-24-28-18-21) 11 Less: Avoidable cost: Tracable fixed manufacturing overhead 12 (119000*31) Contribution margin on addition of Alpha 13 (13000)*(185-40-33-20-25) 14 Financial advantage if beta is dropped 15 Beta 43070001 3689000 871000 253000

A 2 18 B C D 16 9) 17 Differential Analysis-Cane Company - Making Alpha (alt 1) or Buying Alpha (Alt2) Financial advantage Making Alpha (Alt Buying Alpha (Alt| Particulars (Disadvantage) of buying (Alternative 2) 19 Costs: 20 Purchase Price (93000*$132) $0.00 $12,276,000.00 1-$12,276,000.00 21 Direct material $3,720,000.00 $0.00 $3,720,000.00 22 Direct Labor $3,069,000.00 $0.00 $3,069,000.00 23 Variable manufacturing overhead $1,860,000.00 $0.00 $1,860,000.00 24 Avoidable Fixed manufacturing Overhead $3,332,000.00 $0.00 $3,332,000.00 25 26 Total Cost $11,981,000.00 $12,276,000.00 -$295,000.00 27 28 10) 29 Particulars Alpha 30 Total cost of buying from outside (68000*132) 8976000 31 Less: Relvant/Avoidable cost of making 32 Variable manufacturing cost (68000)*(40+33+20) 6324000 33 Traceable fixed cost (119000*28) 3332000 Financial advantage if Alpha purchased from 34 outside 6800001