Cane Company manufactures two products called Alpha and Beta that sell for $210 and $172, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 128,000 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 $38 $34
Variable manufacturing overhead $25 $23
Traceable fixed manufacturing overhead $33 $36
Variable selling expenses $30 $26
Common fixed expenses $33 $28
Total cost per unit $199 $171
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.
Assume that Cane expects to produce and sell 113,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 28,000 additional Alphas for a price of $152 per unit. If Cane accepts the customer's offer, it will decrease Alpha sales to regular customers by 13,000 units.
a. Calculate the incremental net operating income if the order is accepted. (Loss amount should be indicated with a minus sign.)
b. Assume that Cane normally produces and sells 108,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?
c. Assume that Cane normally produces and sells 58,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?
d. Assume that Cane normally produces and sells 78,000 Betas and 98,000 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?
e. Assume that Cane expects to produce and sell 98,000 Alphas during the current year. A supplier has offered to manufacture and deliver 98,000 Alphas to Cane for a price of $152 per unit. If Cane buys 98,000 units from the supplier instead of making those units, how much will profits increase or decrease?
f. Assume that Cane expects to produce and sell 73,000 Alphas during the current year. A supplier has offered to manufacture and deliver 73,000 Alphas to Cane for a price of $152 per unit. If Cane buys 73,000 units from the supplier instead of making those units, how much will profits increase or decrease?

Cane Company

a) The incremental net operating income

= -$964,000

b. Profits would decrease by $3,132,000.

c. Profits would decrease by $1,682,000.

d. Profits would decrease by $1,778,000.

e. If Cane buys 98,000 units from the supplier instead of making those units, profits (savings) would increase by $588,000.

f.  If Cane buys 73,000 units from the supplier instead of making those units, profits (savings) would increase by $438,000.

Explanation:

Products manufactured                            Alpha          Beta

Selling price per unit                                 $210           $172

Annual production capacity                 128,000   $128,000

Units costs:

Direct materials                                           $40            $24

Direct labor                                                  $38            $34

Variable manufacturing overhead             $25            $23

Traceable fixed manufacturing overhead $33            $36

Variable selling expenses                          $30            $26

Common fixed expenses                           $33            $28

Total cost per unit                                     $199            $171

Avoidable (Incremental) Costs:

Products manufactured                            Alpha          Beta

Direct materials                                           $40            $24

Direct labor                                                  $38            $34

Variable manufacturing overhead             $25            $23

Traceable fixed manufacturing overhead $33            $36

Variable selling expenses                          $30            $26

Total incremental per unit                        $166           $143

Selling price per unit                                $210            $172

Contribution margin per unit                    $44             $29

Total Revenue for 28,000 at $152 per unit       $4,256,000

Total avoidable cost for 28,000 at $166             (4,648,000)

Loss: Revenue due to decrease in regular  

customers (13,000 *$210)                    2,730,000

Total avoidable cost of 13,000 * $166  2,158,000 (572,000)

Operating loss if the order is accepted              -$964,000                  

Beta:

Selling price per unit =         $172

Incremental cost per unit = $143

Contribution per unit =         $29

Total contribution margin = $3,132,000 ($29 * 108,000)

Total contribution margin = $1,682,000 ($29 * 58,000)

Total contribution margin = $2,262,000 ($29 * 78,000)

Increase in alpha contribution (484,000) ($44 * 11,000)

Loss of profit =                       $1,778,000

Cost price for outside supply =  $152

Incremental unit cost (internal)  $166

Difference in cost per unit             $6

Profits increase from outside supplier = $6 * 98,000 = $588,000

Profits increase from outside supplier = $6 * 73,000 = $438,000