Question

Cane Company manufactures two products called Alpha and Beta that sell for $120 and $80, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 100,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	30			$	12
Direct labor			20				15
Variable manufacturing overhead			7				5
Traceable fixed manufacturing overhead			16				18
Variable selling expenses			12				8
Common fixed expenses			15				10
Total cost per unit		$	100			$	68

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 40,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

8. Assume that Cane normally produces and sells 60,000 Betas and 80,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 15,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

9. Assume that Cane expects to produce and sell 80,000 Alphas during the current year. A supplier has offered to manufacture and deliver 80,000 Alphas to Cane for a price of $80 per unit. What is the financial advantage (disadvantage) of buying 80,000 units from the supplier instead of making those units?

10. Assume that Cane expects to produce and sell 50,000 Alphas during the current year. A supplier has offered to manufacture and deliver 50,000 Alphas to Cane for a price of $80 per unit. What is the financial advantage (disadvantage) of buying 50,000 units from the supplier instead of making those units?

Answer 1

7) Contribution margin lost if the Beta product line is dropped ($1,600,000)* Traceable fixed manufacturing overhead (100,000 units x $18) $1,800,000 Increase in net operating income if Beta is dropped $200,000 * Beta's contribution margin per unit is $40 ($80 - $40). Therefore, the decrease in contribution margin if Beta is dropped would be $1,600,000 (40,000 units X $40). 8) Contribution margin lost if the Beta product line is dropped ($2,400,000) Traceable fixed manufacturing overhead $1,800,000 Contribution margin on additional Alpha sales $765,000* Increase in net operating income if Beta is dropped $165,000 * Alpha's contribution margin per unit is $51 ($120 - $69). Therefore, the increase in Alpha's contribution margin if Beta is dropped would be $765,000 (15,000 units x $51). Make Buy $6,400,000 $2,400,000 $1,600,000 $560,000 Cost of purchasing (80,000 units x $80) Direct materials (80,000 units x $30) Direct labor (80,000 units x $20) Variable manufacturing overhead (80,000 units x $7) Traceable fixed manufacturing overhead (100,000 units x $16) Total costs $1,600,000 $6,160,000 $6,400,000 Difference in favor of continuing to make the Alphas = $240,000.

10) Make Buy $4,000,000 $1,500,000 $1,000,000 $350,000 Cost of purchasing (50,000 units x $80) Direct materials (50,000 units x $30) Direct labor (50,000 units x $20) Variable manufacturing overhead (50,000 units x $7) Traceable fixed manufacturing overhead (100,000 units x $16) Total costs $1,600,000 $4,450,000 $4,000,000 Difference in favor of continuing to make the Alphas = $450,000.