Cane Company manufactures two products called Alpha and Beta that sell for \$240 and \$162, respectively Each product uses only one type of raw material that costs \$5 per pound. The company has the capacity to annually produce 131,000 units of each product. Its unit costs for each product at this level of activity are given below: Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Alpha Beta \$35 \$15 23 25 38 28 30 48 27 35 32 35 Total cost per unit \$212 \$159 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 value: 1.00 points Required: 1. What is the total amount of traceable fixed manufacturing overhead for the Alpha product line and for the Beta product line? Alpha Beta Traceable fixed manufacturing overhead 35E \$ 38:

Solution

6.

Contribution margin of Beta=sales price – variable cost

=\$162-(\$15+\$23+\$25+\$28)

=\$71 per unit

 Contribution margin lost if Beta is dropped (\$71×110,000) (7,810,000) Traceable fixed manufacturing overhead (\$38×131,000) \$4,978,000 Decrease in net operating income if Beta is dropped (2,832,000)

7.

 Contribution margin lost if Beta is dropped (\$71×60,000) (4,260,000) Traceable fixed manufacturing overhead (\$38×131,000) \$4,978,000 Increase in net operating income if Beta is dropped \$718,000

8.

Contribution margin of Alpha=sales price – variable cost

=\$240-(\$35+\$48+\$27+\$32)

=\$98 per unit

 Contribution margin lost if Beta is dropped (\$71×80,000) (5,680,000 Traceable fixed manufacturing overhead \$4,978,000 Contribution margin on additional Alpha sales (\$98×13000) \$1,274,000 Increase in net operating income if Beta is dropped \$572,000

9.

 Make Buy Cost of purchasing (100,000×\$160) \$16,000,000 Direct material (100000×\$35) \$3,500,000 Direct labour (100,000×\$48) \$4,800,000 Variable manufacturing overhead (100,000×\$27) \$2,700,000 Traceable fixed manufacturing overhead (\$35×131000) \$4,585,000 Total cost \$15,585,000 \$16,000,000 Difference in favour of continuing making of Alpha \$415,000