Question: Cane Company manufactures two products called Alpha and Beta that sell for $165 and $130, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 113,000 units of each product. Its unit costs for each product at this level of activity are given below:
|
Alpha
|
Beta
|
|
Direct materials
|
$40
|
$24
|
|
|
Direct labor
|
29
|
25
|
|
|
Variable manufacturing overhead
|
15
|
14
|
|
|
Traceable fixed manufacturing overhead
|
25
|
27
|
|
|
Variable selling expenses
|
21
|
17
|
|
|
Common fixed expenses
|
24
|
19
|
|
|
Total cost per unit
|
$154
|
$126
|
|
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 expects to produce and sell 104,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 19,000 additional Alphas for a price of $116 per unit. If Cane accepts the customer's offer, it will decrease Alpha sales to regular customers by 10,000 units.
a. Calculate the incremental net operating income if the order is accepted? (Loss amount should be indicated with a minus sign.)
b. Based on your calculations above should the special order be accepted?
2. Assume that Cane normally produces and sells 49,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?
3. Assume that Cane normally produces and sells 69,000 Betas and 89,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 13,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?
4. Assume that Cane expects to produce and sell 89,000 Alphas during the current year. A supplier has offered to manufacture and deliver 89,000 Alphas to Cane for a price of $116 per unit. If Cane buys 89,000 units from the supplier instead of making those units, how much will profits increase or decrease?
5. Assume that Cane expects to produce and sell 59,000 Alphas during the current year. A supplier has offered to manufacture and deliver 59,000 Alphas to Cane for a price of $116 per unit. If Cane buys 59,000 units from the supplier instead of making those units, how much will profits increase or decrease?