Reference no: EM132638793

Cane Company manufactures two products called Alpha and Beta that sell for $120 and $80, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 100,000 units of each product. Its unit costs for each product at this level of activity are given below:

                                                                     Alpha                    Beta

Direct materials                                      $30                 $12
Direct labour                                              20                15
Variable manufacturing overhead                     7               5
Traceable fixed manufacturing overhead          16                  18
Variable selling expenses                                12                 8
Common fixed expenses                              15               10
Cost per unit                                         $100                   $68

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.

Required:

Question 1: Assume that Cane expects to produce and sell 95,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 10,000 additional Alphas for a price of $80 per unit. If Cane accepts the customer's offer, it will decrease Alpha sales to regular customers by 5,000 units.
a. Calculate the incremental net operating income if the order is accepted? (Loss amount should be indicated with a minus sign.)

Question 2: Assume that Cane normally produces and sells 90,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

Question 3: Assume that Cane normally produces and sells 40,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

Question 4: Assume that Cane's customers would buy a maximum of 80,000 units of Alpha and 60,000 units of Beta. Also assume that the company's raw material available for production is limited to 160,000 pounds. How many units of each product should Cane produce to maximize its profits?