Cane Company manufactures two products called Alpha and Beta that sell for $135 and $95, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 105,000 units of each product. Its unit costs for each product at this level of activity are given below:
| Alpha | Beta | |||||||
| Direct materials | $ | 30 | $ | 18 | ||||
| Direct labor | 23 | 16 | ||||||
| Variable manufacturing overhead | 10 | 8 | ||||||
| Traceable fixed manufacturing overhead | 19 | 21 | ||||||
| Variable selling expenses | 15 | 11 | ||||||
| Common fixed expenses | 18 | 13 | ||||||
| Total cost per unit | $ | 115 | $ | 87 | ||||
| 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. | ||||||||
Required:
5. Assume that Cane expects to produce and sell 98,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 13,000 additional Alphas for a price of $92 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 6,000 units.
a. Calculate the incremental net operating income if the order is accepted? (Loss amount should be indicated with a minus sign.)
b. Based on your calculations above should the special order be accepted?
6. Assume that Cane normally produces and sells 93,000 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 43,000 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 63,000 Betas and 83,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 18,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?
9. Assume that Cane expects to produce and sell 83,000 Alphas during the current year. A supplier has offered to manufacture and deliver 83,000 Alphas to Cane for a price of $92 per unit. If Cane buys 83,000 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 53,000 Alphas during the current year. A supplier has offered to manufacture and deliver 53,000 Alphas to Cane for a price of $92 per unit. If Cane buys 53,000 units from the supplier instead of making those units, how much will profits increase or decrease?
11. How many pounds of raw material are needed to make one unit of Alpha and one unit of Beta?
12. What contribution margin per pound of raw material is earned by Alpha and Beta? (Round your answers to 2 decimal places.)
13. Assume that Cane’s customers would buy a maximum of 83,000 units of Alpha and 63,000 units of Beta. Also assume that the company’s raw material available for production is limited to 200,000 pounds. How many units of each product should Cane produce to maximize its profits?
14. Assume that Cane’s customers would buy a maximum of 83,000 units of Alpha and 63,000 units of Beta. Also assume that the company’s raw material available for production is limited to 200,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?
15. Assume that Cane’s customers would buy a maximum of 83,000 units of Alpha and 63,000 units of Beta. Also assume that the company’s raw material available for production is limited to 200,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)
| Answer to Ques 5 a | Scenario1 | Scenario 2 |
| Units Sold | 98000 | 105000 |
| Selling Price | 135 | 92$ for 13000 units and the rest 92000 units for 135$ |
| Amount in $ | 13230000 | 13616000 |
| Increase in Net operating Income ($) | 386000 | |
| Answer to Ques 5 b | The offer should be accepted because there is an incremental gain of $386000 | |
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