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[The following information applies to the questions displayed below Cane Company manufactures two products called Alpha and Beta that sell for $125 and $85, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 101,000 units of each product. Its unit costs for each product at this level of activity are given belovw Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Alpha Beta $30 $ 12 21 20 80 19 9 8 17 13 16 Total cost per unit $105 $ 77 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.
Expert Answer
| 09) | ||
| Cost of purchasing 81000 Alphas = 81000*$84 = | 6804000 | |
| Savings in variable cost of production of 81000 Alphas = 81000*(30+21+8)= | 4779000 | |
| Traceable fixed manufacturing overhead costs avoided = 101000*$17 = | 1717000 | |
| Net incremental cost = 6804000-4779000-1717000 = | 308000 | |
| PROFITS WILL DECREASE BY $308,000 | ||
| 10) | ||
| Cost of purchasing 81000 Alphas = 51000*$84 = | 4284000 | |
| Savings in variable cost of production of 51000 Alphas = 51000*(30+21+8)= | 3009000 | |
| Traceable fixed manufacturing overhead costs avoided = 101000*$17 = | 1717000 | |
| Net incremental savings = 3009000+1717000-4284000 = | 442000 | |
| PROFITS WILL INCREASE BY $442,,000 | ||
| 13) As the raw material availability is limited the product with higher contribution margin per unit | ||
| of raw material should be produced to the maximum extent possible. The balance of raw material | ||
| available should be used for the other products. | ||
| Contribution margin per unit of Alpha = 125-30-21-8-13 = | 53 | |
| Contribution margin per unit of Beta = 85-12-20-6-9 = | 38 | |
| Raw material required per unit of Alpha = 30/6 = 5 pounds | ||
| Raw material required per unit of Beta = 12/6 = 2 pounds | ||
| CM per pound of material for Alpha = 53/5 = $10.6 | ||
| CM per pound of material for Beta = 38/2 = $19.0 | ||
| As the contribution per pound of raw material is more for Beta it should be produced | ||
| to the maximum extent possible. | ||
| So, 61000 units of Beta should be produced. The raw material required for it is 61000*2 = 122000 pounds | ||
| Balance raw material available = 161000 – 122000= 39000 pounds | ||
| Possible production of Alpha = 39000/5 = 7800 units | ||
| Production for maximum profit: | ||
| Alpha – 7800 units Beta 61000 units | ||
| 14) | ||
| Total contribution margin = 7800*53+61000*38 = $2,731,400 | ||
