Cane Company manufactures two products called Alpha and Beta that sell for $195 and $150, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 123,000 units of each product. Its unit costs for each product at this level of activity are given below: Alpha Beta
Direct materials $ 40 $15
Direct labor 34 28
Variable manufacturing overhead 22 20
Traceable fixed manufacturing overhead 30 33
Variable selling expenses 27 23
Common fixed expenses 30 25
Total cost per unit $183 $ 144
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.
5. Assume that Cane expects to produce and sell 110,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 25,000 additional Alphas for a price of $140 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 12,000 units.
a. Calculate the incremental net operating income if the order is accepted?
6. Assume that Cane normally produces and sells 105,000 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 55,000 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 75,000 Betas and 95,000 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 95,000 Alphas during the current year. A supplier has offered to manufacture and deliver 95,000 Alphas to Cane for a price of $140 per unit. If Cane buys 95,000 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 70,000 Alphas during the current year. A supplier has offered to manufacture and deliver 70,000 Alphas to Cane for a price of $140 per unit. If Cane buys 70,000 units from the supplier instead of making those units, how much will profits increase or decrease?
How many pounds of raw material are needed to make one unit of Alpha and one unit of Beta?
12. What contribution margin per pound of raw material is earned by Alpha and Beta?
13. Assume that Cane’s customers would buy a maximum of 95,000 units of Alpha and 75,000 units of Beta. Also assume that the company’s raw material available for production is limited to 245,000 pounds. How many units of each product should Cane produce to maximize its profits?
14. Assume that Cane’s customers would buy a maximum of 95,000 units of Alpha and 75,000 units of Beta. Also assume that the company’s raw material available for production is limited to 245,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?
15. Assume that Cane’s customers would buy a maximum of 95,000 units of Alpha and 75,000 units of Beta. Also assume that the company’s raw material available for production is limited to 245,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)