Ace Company manufactures two products called A and B that sell for $100 and $60

Question

Ace Company manufactures two products called A and B that sell for $100 and $60 respectively. Each product uses only one type of raw material that cost $5 per pound. Ace has the capacity to annually produce 100,000 units of each product. The unit cost for each product at this level of capacity is given below:

                                                                                                                Product

                                                                                                A                                             B

                Direct Material                                                  25                                           10

                Direct Labor                                                        15                                           10

                Variable Manufacturing Overhead           10                                           5

                Traceable Fixed Overhead                           15                                           10

                Variable Selling expenses                             10                                           5

                Common Fixed Overhead                            15.62                                     9.38

Total Cost per Unit                                                          $90.62                                   $49.38

Ace considers its traceable fixed manufacturing overhead to be avoidable, but its common fixed expenses are deemed unavoidable. The common fixed expenses have been allocated to products based on sales dollars.

Answer each question independently unless instructed otherwise.

Use an excel format to answer each question.

A.The economy is in a slump; unit sales are down. Cane forecasts unit sales for 50,000 alphas and 25,000 Betas. Cane is contemplating closing the Beta line.

Assume that the selling price of beta units is reduced to $50 and fixed costs traceable to the beta line are $550,000. If the beta line is discontinued what will be the product line segment margin? What will be the net operating income for Cane? Note: when computing the Product Line Segment Margin, common fixed expenses are not allocated to the product lines; use exhibit 12-4, page 542 for an example to compute the product line segment margin.

2. Refer to 1 above. If the beta line is discontinued alpha unit sales will be reduced 5%. What will be the product line segment margin if the beta line is discontinued; what will be the net operating income?

B. The economy is booming; demand is up. Cane cannot get enough raw material to meet demand; only 500,000 pounds of raw material are available.

1. Assume the selling price for alpha and beta is $120 and $52 respectively. If maximum customer demand is 80,000 units of alpha and 60,000 units of beta, how many units of each product should Cane produce to maximize profit?

2. Refer to 1 above. What will be the Product Line Segment Margin; the net operating income?

Explanation / Answer

Answer A.1. Calculation of Product Line Segment Margin & Net Operating Income of Alpha, If Beta is Discontinued Alpha Sales in Units                50,000 SP per Unit                      100 Sales In $          5,000,000 Less: Variable Costs Direct Material (50000 Units X $25)          1,250,000 Direct Labor (50000 Units X $15)              750,000 Variable MOH (50000 Units X $10)              500,000 Variable Selling Exp.MOH (50000 Units X $10)              500,000 Total Variable Costs          3,000,000 Contribution          2,000,000 Less: Traceable Fixed Overhead (100000 Units X $15)          1,500,000 Product Line Segment Margin              500,000 Less: Common Fixed Overhead ($15.62 + 9.38) X 100000 Units          2,500,000 Net Operating Profit / (Loss)        (2,000,000) Answer A.2. Calculation of Product Line Segment Margin & Net Operating Income of Alpha, If Beta is Discontinued Alpha Sales in Units (50000 Units X 95%)                47,500 SP per Unit                      100 Sales In $          4,750,000 Less: Variable Costs Direct Material (47500 Units X $25)          1,187,500 Direct Labor (47500 Units X $15)              712,500 Variable MOH (47500 Units X $10)              475,000 Variable Selling Exp.(47500 Units X $10)              475,000 Total Variable Costs          2,850,000 Contribution          1,900,000 Less: Traceable Fixed Overhead (100000 Units X $15)          1,500,000 Product Line Segment Margin              400,000 Less: Common Fixed Overhead ($15.62 + 9.38) X 100000 Units          2,500,000 Net Operating Profit / (Loss)        (2,100,000) Answer B. Alpha Beta S P per Unit                      100                    60 Less: Variable Costs per Unit Direct Material                         25                    10 Direct Labor                         15                    10 Variable MOH                         10                      5 Variable Selling Exp.                         10                      5 Total Variable Exp.                         60                    30 Contribution Per Unit                         40                    30 Material Required per Unit in Pound                           5                      2 Contribution Per Unit per Pound                           8                    15 Ranking II I If, Direct Material is in Scarcity, Cane should Produce Maximum No. of Beta to earn maximum Profit Total Direct Material Available in Pounds              500,000 Less: Required for Production of Beta (60000 Units X 2 Pounds)              120,000 Balance Available              380,000 Used for Production Of Alpha (76000 Units X 5 Pounds)              380,000 Balance Available                          -   Calculation of Product Line Segment Margin & Net Operating Income Alpha Beta Total No of units Sold                76,000            60,000 SP Per Unit                      100                    60 Sales In $          7,600,000      3,600,000          11,200,000 Less: Variable Costs Direct Material          1,900,000         600,000            2,500,000 Direct Labor          1,140,000         600,000            1,740,000 Variable MOH              760,000         300,000            1,060,000 Variable Selling Exp.              760,000         300,000            1,060,000 Total Variable Exp.          4,560,000      1,800,000            6,360,000 Contribution          3,040,000      1,800,000            4,840,000 Less: Traceable Fixed Overhead          1,500,000      1,000,000            2,500,000 Product Line Segment Margin          1,540,000         800,000            2,340,000 Less: Common Fixed Overhead            2,500,000 Net Operating Profit (Loss)              (160,000)

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