Cane Company manufactures two products called Alpha and Beta

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:

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 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? (Input the amount as positive value.)

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:

Solution

Answer : Loss increase by $ 13,91,000 Raw Material per unit    Aplha = $ 40/$ 5 = 8 Beta = $ 15/$ 5 = 3 Calculation of Contribution in $ Alpha Beta Sale Price 195 150 Variable Cost Direct Material 40 15 Direct Labour 34 28 Variable Manf.Oh. 22 20 Variable Selling Exp 27 23 Total 123 86 Contribution 72 64 Contribution per Raw material 9 21.33333333 Profit Statement Alpha Beta Total Sales Unit 75000 95000 Contribution $ 54,00,000.00 $ 60,80,000.00 Fixed Cost Common $ 22,50,000.00 $ 23,75,000.00 Traceable $ 36,90,000.00 $ 40,59,000.00 Net profit $ -5,40,000.00 $ -3,54,000.00 $ -8,94,000.00 if beta discontinue , alpha increase 15000 unit    Alpha Beta Total Sales Unit 90000 0 Contribution $ 64,80,000.00 $ 0.00 Fixed Cost Common $ 27,00,000.00 $ 23,75,000.00 Traceable $ 36,90,000.00 $ 0.00 Net profit $ 90,000.00 $ -23,75,000.00 $ -22,85,000.00 Increase in Profit /-loss $ -13,91,000.00