Cane Company manufactures two products called Alpha and Beta

Cane Company manufactures two products called Alpha and Beta that sell for $180 and $145, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 118,000 units of each product. Its unit costs 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 deemed unavoidable and have been allocated to products based on sales dollars.

1. Assume that Cane normally produces and sells 102,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

2. Assume that Cane normally produces and sells 52,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

3. Assume that Cane expects to produce and sell 62,000 Alphas during the current year. A supplier has offered to manufacture and deliver 62,000 Alphas to Cane for a price of $128 per unit. If Cane buys 62,000 units from the supplier instead of making those units, how much will profits increase or decrease?

Solution

1. Profits decrease by $2274000

2. Profits increase by $576000

3. Profits increase by $644000

Note: The selling price and variable selling expenses will not change with the alternatives and hence are irrelevant. Common fixed expenses are unavoidable and hence irrelevant as they too will not change with the alternatives.