Cane Company manufactures two products called Alpha and Beta that sell for $205
ID: 2462587 • Letter: C
Question
Cane Company manufactures two products called Alpha and Beta that sell for $205 and $164, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 127,000 units of each product. Its unit costs for each product at this level of activity are given below:
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 normally produces and sells 107,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?
Assume that Cane normally produces and sells 57,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?
Cane Company manufactures two products called Alpha and Beta that sell for $205 and $164, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 127,000 units of each product. Its unit costs for each product at this level of activity are given below:
Explanation / Answer
With alpha and beta line the no of units sold each is
Alpha=20,000
Beta=107,000
Revenue of alpha=20000*205=4,100,000
Revenue of Beta=165*107000=17,548,000
cost of alpha=20000*194=3,880,000
cost of beta=107000*163=17,441,000
Net income of alpha=revenue-cost=220,000
netincome of beta= revenue-cost=107,000
Case 2: when beta line is shut off
Net income=127,000*(205-194)=1,397,000
Increase in net income by(1397000-(220000+107000)=$1,070,000
2)
Alpha=70,000
Beta=57,000
Revenue of alpha=70000*205=14,350,000
Revenue of Beta=165*57000=9,348,000
cost of alpha=70000*194=13,580,000
cost of beta=57000*163=9,291,000
Net income of alpha=revenue-cost=770,000
netincome of beta= revenue-cost=57,000
Case 2: when beta line is shut off
Net income=127,000*(205-194)=1,397,000
Increase in net income by(1397000-(770000+57000)=$570,000