Question

Cane Company manufactures two products called Alpha and Beta that sell for $140 and $100, respectively Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 106,000 units of each product. Its unit costs for each product at this level of activity are given below: Beta S 16 Alpha S 32 24 10 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses 20 16 Total cost per unit S 121 S 92 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: Assume that Cane normally produces and sells 64.000 Betas and 84.000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 19,000 units If Cane discontinues the Beta product line, how much would profits increase or decrease? (Input the amount as positive value.) Profit Click to select) by S

Answer 1

Existing Sales and Profit
Particulars	Alpha		Beta		Total
	$		$		$
	For 1 unit	For 64000 units	For 1 unit	For 84000 units
Sales	140	8,960,000	100	8,400,000	17,360,000
Direct Material	32	2,048,000	16	1,344,000	3,392,000
Direct Labour	24	1,536,000	19	1,596,000	3,132,000
Variable manufacturing overhead	10	640,000	9	756,000	1,396,000
Traceable fixed manufacturing overhead	20	1,280,000	22	1,848,000	3,128,000
Variable selling expenses	16	1,024,000	12	1,008,000	2,032,000
Common fixed expenses	19	1,216,000	14	1,176,000	2,392,000
Total cost	121	7,744,000	92	7,728,000	15,472,000
Profit					1,888,000
Estimated Sales and Profit after discountinuance of Beta
Particulars	Alpha				Total
	$				$
	For 1 unit	For 83000 units
Sales	140	11,620,000			11,620,000
Direct Material	32	2,656,000			2,656,000
Direct Labour	24	1,992,000			1,992,000
Variable manufacturing overhead	10	830,000			830,000
Variable selling expenses	16	1,328,000			1,328,000
Common fixed expenses = (1216000/8960000) x 11620000	19	1,577,000			1,577,000
Total cost	101	8,383,000	0	0	8,383,000
Profit					3,237,000
Profit increases by					1,349,000