Cane Company manufactures two products called Alpha and Beta that sell for $120 and $80, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 100,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	30			$	12
Direct labor			20				15
Variable manufacturing overhead			7				5
Traceable fixed manufacturing overhead			16				18
Variable selling expenses			12				8
Common fixed expenses			15				10
Total cost per unit		$	100			$	68

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.

3.

Assume that Cane expects to produce and sell 80,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 10,000 additional Alphas for a price of $80 per unit. If Cane accepts the customers offer, how much will its profits increase or decrease?

4.

Assume that Cane expects to produce and sell 90,000 Betas during the current year. One of Canes sales representatives has found a new customer that is willing to buy 5,000 additional Betas for a price of $39 per unit. If Cane accepts the customers offer, how much will its profits increase or decrease?

5.

Assume that Cane expects to produce and sell 95,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 10,000 additional Alphas for a price of $80 per unit. If Cane accepts the customers offer, it will decrease Alpha sales to regular customers by 5,000 units.

a.

Calculate the incremental net operating income if the order is accepted? (Loss amount should be indicated with a minus sign.)

6.

Assume that Cane normally produces and sells 90,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

7.

Assume that Cane normally produces and sells 40,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

8.

Assume that Cane normally produces and sells 60,000 Betas and 80,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 15,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?

9.

Assume that Cane expects to produce and sell 80,000 Alphas during the current year. A supplier has offered to manufacture and deliver 80,000 Alphas to Cane for a price of $80 per unit. If Cane buys 80,000 units from the supplier instead of making those units, how much will profits increase or decrease?

10.

Assume that Cane expects to produce and sell 50,000 Alphas during the current year. A supplier has offered to manufacture and deliver 50,000 Alphas to Cane for a price of $80 per unit. If Cane buys 50,000 units from the supplier instead of making those units, how much will profits increase or decrease?

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253 answers

		Alpha		Beta
Units		100,000		100,000
Selling price		120		80
Direct material @ $ 6		30		12
Direct Labour		20		15
Variable Manufacturing Overhead		7		5
Variable Selling Expenses		12		8
Total Variable Cost		69		40
Contribution Margin		51		40
Total Contribution			5,100,000		4,000,000
Traceable Fixed Manufacturing Overhead		16	1,600,000	18	1,800,000
Common Fixed Cost		15	1,500,000	10	1,000,000
Net Profit			2,000,000		1,200,000

3.

Cane to produce and sell 80000 alpha +10000 additional alphas @ $80 per unit
Sales of 80000 units		9,600,000
Sales of 10000 units		800,000
Variable Cost		6,210,000
Contribution Margin		4,190,000
Fixed Cost (16*90000+1500000)		2,940,000
Net Profit		1,250,000
Incremental Profit ($2000000-$1090000)		(750,000) WRONG Answer

4.

Cane to produce and sell 90000 Betas +5000 additional betas @ $39 per unit
Sales of 90000 units		7,200,000
Sales of 5000 units		195,000
Variable Cost		3,800,000
Contribution Margin		3,595,000
Fixed Cost (18*95000+1000000)		2,710,000
Net Profit		885,000
Incremental Profit ($1200000-$885000)		(315,000) WRONGS ANSWER

5.

Cane expects to produce and sold 95000 units: Special order for 10000 units @ $ 80
Incremental Profit if order is accepted
If order of 10000 units accepted Cane has to forego regular sales of 5000 units
Contribution from special order (10000*(80-69)		110,000
contribution from regular order 90000*(120-69)		4,590,000
Total Contribution		4,700,000
Less Fixed Cost		2,940,000
Net Profit		1,760,000
Incremental Profit (1760000-2000000)		(240,000) WRONG ANSWER

6.

Cane normally produces 90000 units of Beta if product line is discontinued
Profit of Alpha		2,000,000
Less Fixed Cost of Beta (unavoidable)		1,000,000
Net Profit		1,000,000
Existing Profit (2000000+1200000		3,200,000
Incremental Profit		(2,200,000) WRONG ANSWER