Question

Cane Company manufactures two products called Alpha and Beta that sell for $170 and $130, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 116,000 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			$	18
Direct labor			30				25
Variable manufacturing overhead			20				15
Traceable fixed manufacturing overhead			26				28
Variable selling expenses			22				18
Common fixed expenses			25				20
Total cost per unit		$	153			$	124

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.

6. Assume that Cane normally produces and sells 100,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

7. Assume that Cane normally produces and sells 50,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

8. Assume that Cane normally produces and sells 70,000 Betas and 90,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 14,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

9. Assume that Cane expects to produce and sell 90,000 Alphas during the current year. A supplier has offered to manufacture and deliver 90,000 Alphas to Cane for a price of $120 per unit. What is the financial advantage (disadvantage) of buying 90,000 units from the supplier instead of making those units?

10. Assume that Cane expects to produce and sell 60,000 Alphas during the current year. A supplier has offered to manufacture and deliver 60,000 Alphas to Cane for a price of $120 per unit. What is the financial advantage (disadvantage) of buying 60,000 units from the supplier instead of making those units?

Answer 1

BETA
CONTRIBUTION PER UNIT CALCULATION
SALES		$        130
Direct materials	$   18
Direct labor	$   25
Variable manufacturing overhead	$   15
Variable selling expenses	$   18	$           76
CONTRIBUTION PER UNIT		$           54
ALPHA
CONTRIBUTION PER UNIT CALCULATION
SALES		$        170
Direct materials	$   30
Direct labor	$   30
Variable manufacturing overhead	$   20
Variable selling expenses	$   22	$        102
CONTRIBUTION PER UNIT		$           68

6)
SAVING OF TRACEABLE FIXED MANUFACTURING OVERHEAD	$   3,248,000
28 * 116000
LESS: CONTRIBUTION LOST
54 * 100000	$   5,400,000
COMMON FIXED EXPENSES	$   2,320,000
20 * 116000
LOSS ON STOPPING PRODUCTION OF BETA	$ (4,472,000)
7)
SAVING OF TRACEABLE FIXED MANUFACTURING OVERHEAD	$   3,248,000
28 * 116000
LESS: CONTRIBUTION LOST
54 * 50000	$   2,700,000
COMMON FIXED EXPENSES	$   2,320,000
20 * 116000
LOSS ON STOPPING PRODUCTION OF BETA	$ (1,772,000)
8)
SAVING OF TRACEABLE FIXED MANUFACTURING OVERHEAD	$   3,248,000
28 * 116000
CONTRIBUTION EARNED FROM ADDITIONAL UNITS OF ALPHA	$   6,120,000
90000 * 68
LESS: CONTRIBUTION LOST
54 * 70000	$   3,780,000
COMMON FIXED EXPENSES	$   2,320,000
20 * 116000
PROFIT ON STOPPING PRODUCTION OF BETA AND PRODUCING ADDITIONAL UNITS OF ALPHA	$   3,268,000

9)
Direct materials	$   30
Direct labor	$   30
Variable manufacturing overhead	$   20
Traceable fixed manufacturing overhead	$                26
TOTAL MANUFACTURING COST OF ALPHA	$              106
PRICE OFFERED BY SUPPLIER	$ 120
ADDITIONAL PRICE IN PURCHASING FROM SUPPLIER	$                14
APLHA SHOULD BE MANUFACTURED IN HOUSE

LOSS IN BUYING 90000 UNITS FROM SUPPLIER

$ 1,260,000

10 )

LOSS IN BUYING 60000 UNITS FROM SUPPLIER

$     840,000