ane Company manufactures two products called Alpha and Beta that sell for $190 and $155, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 122,000 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 |
34 |
28 |
|
| Variable manufacturing overhead |
21 |
19 |
|
| Traceable fixed manufacturing overhead |
29 |
32 |
|
| Variable selling expenses |
26 |
22 |
|
| Common fixed expenses |
29 |
24 |
|
|
|
|
|
| Total cost per unit |
179 |
149 |
|
|
|
|
|
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.
1. Assume that Cane expects to produce and sell 104,000 Betas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 3,000 additional Betas for a price of $62 per unit. If Cane accepts the customer's offer, how much will its profits increase or decrease?
2. Assume that Cane expects to produce and sell 109,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 24,000 additional Alphas for a price of $136 per unit. If Cane accepts the customer's offer, it will decrease Alpha sales to regular customers by 11,000 units. Calculate the incremental net operating income if the order is accepted? (Loss amount should be indicated with a minus sign.)
3. Assume that Cane normally produces and sells 104,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?
4. Assume that Cane normally produces and sells 54,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?