Cane Company manufactures two products called Alpha and Beta that sell for $175

Question

Cane Company manufactures two products called Alpha and Beta that sell for $175 and $135, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 117,000 units of each product. Its average cost per unit 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 unavoidable and have been allocated to products based on sales dollars.

7. Assume that Cane normally produces and sells 51,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

8. Assume that Cane normally produces and sells 71,000 Betas and 91,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 11,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

Alpha Beta Direct materials $ 40 $ 15 Direct labor 30 30 Variable manufacturing overhead 18 16 Traceable fixed manufacturing overhead 26 29 Variable selling expenses 23 19 Common fixed expenses 26 21 Total cost per unit $ 163 $ 130

Explanation / Answer

7 Loss in contribution margin -2805000 =51000*(135-15-30-16-19) Avoidable fixed costs 3393000 =117000*29 Financial advantage 588000 8 Loss in contribution margin -3905000 =71000*(135-15-30-16-19) Additional contribution margin from Alpha 704000 =11000*(175-40-30-18-23) Avoidable fixed costs 3393000 =117000*29 Financial advantage 192000

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