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Question: [The following information applies to the questions displayed below.] Cane Company manufactures t...

[The following information applies to the questions displayed below.]

Cane Company manufactures two products called Alpha and Beta that sell for $225 and $175, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 130,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

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 59,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

8. Assume that Cane normally produces and sells 79,000 Betas and 99,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 12,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

9. Assume that Cane expects to produce and sell 99,000 Alphas during the current year. A supplier has offered to manufacture and deliver 99,000 Alphas to Cane for a price of $156 per unit. What is the financial advantage (disadvantage) of buying 99,000 units from the supplier instead of making those units?

Alpha Beta Direct materials $ 42 $ 24 Direct labor 42 32 Variable manufacturing overhead 26 24 Traceable fixed manufacturing overhead 34 37 Variable selling expenses 31 27 Common fixed expenses 34 29 Total cost per unit $ 209 $ 173

Explanation / Answer

Solution 7:

There is financial advantage of $798,000 by discontinuing Beta line.

Solution 8:

There is financial advantage of $446,000 by discontinuing Beta line.

Solution 9:

There is financial disadvantage of $134,000 by buying alpha from supplier

Differential Analysis - Sale Beta (59000 units) (alt 1) or Discontinue Beta (Alt2) Particulars Sale Beta (59000 Units)
(Alt 1) Discontinue Beta (Alt 2) Differential effect on income (Alt 2) Details Amount Details Amount Revenue 59000*$175 $10,325,000.00 $0.00 -$10,325,000.00 Costs: Direct Material 59000*$24 $1,416,000.00 $0.00 -$1,416,000.00 Direct Labor 59000*$32 $1,888,000.00 $0.00 -$1,888,000.00 Variable manufacturing Overhead 59000*$24 $1,416,000.00 $0.00 -$1,416,000.00 Variable Selling Expenses 59000*$27 $1,593,000.00 $0.00 -$1,593,000.00 Traceable Fixed manufacturing overhead 130000*$37 $4,810,000.00 $0.00 -$4,810,000.00 Common fixed expenses 130000*$29 $3,770,000.00 130000*$29 $3,770,000.00 $0.00 Income / (Loss) -$4,568,000.00 -$3,770,000.00 $798,000.00

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