Cane Company manufactures two products called Alpha and Beta

Cane Company manufactures two products called Alpha and Beta that sell for $185 and $120, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 112,000 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.

1. Assume that Cane normally produces and sells 48,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

2. Assume that Cane normally produces and sells 68,000 Betas and 88,000 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?

3. Assume that Cane expects to produce and sell 88,000 Alphas during the current year. A supplier has offered to manufacture and deliver 88,000 Alphas to Cane for a price of $112 per unit. What is the financial advantage (disadvantage) of buying 88,000 units from the supplier instead of making those units?

4. Assume that Cane expects to produce and sell 58,000 Alphas during the current year. A supplier has offered to manufacture and deliver 58,000 Alphas to Cane for a price of $112 per unit. What is the financial advantage (disadvantage) of buying 58,000 units from the supplier instead of making those units?

	Alpha	Beta
Direct materials		$	30			$	10
Direct labor			22				29
Variable manufacturing overhead			20				13
Traceable fixed manufacturing overhead			24				26
Variable selling expenses			20				16
Common fixed expenses			23				18
Total cost per unit		$	139			$	112

Solution

1) Beta 48000 units per year Sale Price 48000*120 5760000 Direct Materials 48000*10 -480000 Direct Labour 48000*29 -1392000 Variable Manufacturing overhead 48000*13 -624000 Variable selling expenses 48000*16 -768000 Traceable Fixed manufacturing overhead 112000*26 -2912000 Common fixed expenses 112000*18 -2016000 Profit/(Loss) from sale -2432000 If the product is sold it would lead to Loss of Rs -2432000 If the product is discountinued there would be expense of Rs 2016000 which is common fixed expenses which is unavoidable 2) If Beta Product is discountinued, the profit would be as follows Alpa (88000+12000) = 100000 units Sale Price 100000*185 18500000 Direct Materials 100000*30 -3000000 Direct Labour 100000*22 -2200000 Variable Manufacturing overhead 100000*20 -2000000 Variable selling expenses 100000*20 -2000000 Traceable Fixed manufacturing overhead 112000*24 -2688000 Common fixed expenses 112000*23 -2576000 Common fixed expenses 112000*18 -2016000 Profit/(Loss) from sale 2020000 If beta product is continued the profit would be Alpha Beta 88000 68000 Sale Price 16280000 8160000 Direct Materials -2640000 -680000 Direct Labour -1936000 -1972000 Variable Manufacturing overhead -1760000 -884000 Variable selling expenses -1760000 -1088000 Traceable Fixed manufacturing overhead -2688000 -2912000 Common fixed expenses -2576000 -2016000 3008000 -1324000 The overall profit would be $1684000 which is lower than the profit if Beta is discountinued The advantage would be (2020000-1684000) 336000 3 If 88000 units are produced the profit is $3008000 If 88000 units are bought for a price of $112 per unit Sales 16280000 Less : Cost (88000*112) -9856000 Less: Common fixed expenses(unavoidable) -4592000 1832000 There would be financial disadvantage of (3008000-1832000) 1176000 4) If 58000 units are bought for a price of $112 per unit Sales 10730000 Less : Cost (58000*112) -6496000 Less: Common fixed expenses -4592000 -358000 Alpha 58000 Sale Price 10730000 Direct Materials -1740000 Direct Labour -1276000 Variable Manufacturing overhead -1160000 Variable selling expenses -1160000 Traceable Fixed manufacturing overhead -2688000 Common fixed expenses -4592000 -1886000 If purchase the loss would be -358000 else it would be -1886000 The answer to 3 and 4 is based on the assumption that the common fixed expenses would still be continued