Cane Company manufactures two products called Alpha and Beta that sell for $155 and $115, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 110,000 units of each product. Its unit costs for each product at this level of activity are given below: Alpha Beta
Direct materials $24 $12
Direct labor 23 26
Variable manufacturing
overhead 22 12
Traceable fixed
manufacturing overhead 23 25
Variable selling expenses 19 15
Common fixed expenses 22 17
Total cost per unit $133 $107
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 87,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 17,000 additional Alphas for a price of $108 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease?
2. Assume that Cane expects to produce and sell 97,000 Betas during the current year. One of Cane’s sales representatives has found a new customer that is willing to buy 3,000 additional Betas for a price of $46 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease?
3. Assume that Cane expects to produce and sell 102,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 17,000 additional Alphas for a price of $108 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 9,000 units. Calculate the incremental net operating income if the order is accepted?
4. Assume that Cane normally produces and sells 97,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?
5. Assume that Cane normally produces and sells 67,000 Betas and 87,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 11,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?
6. Assume that Cane expects to produce and sell 87,000 Alphas during the current year. A supplier has offered to manufacture and deliver 87,000 Alphas to Cane for a price of $108 per unit. If Cane buys 87,000 units from the supplier instead of making those units, how much will profits increase or decrease?
7. Assume that Cane expects to produce and sell 57,000 Alphas during the current year. A supplier has offered to manufacture and deliver 57,000 Alphas to Cane for a price of $108 per unit. If Cane buys 57,000 units from the supplier instead of making those units, how much will profits increase or decrease?