6. Assume that Cane normally produces and sells 104,000 Betas per year. What is

Question

6. Assume that Cane normally produces and sells 104,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

7. Assume that Cane normally produces and sells 54,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

8. Assume that Cane normally produces and sells 74,000 Betas and 94,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 14,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

9. Assume that Cane expects to produce and sell 94,000 Alphas during the current year. A supplier has offered to manufacture and deliver 94,000 Alphas to Cane for a price of $136 per unit. What is the financial advantage (disadvantage) of buying 94,000 units from the supplier instead of making those units?

Cane 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 average cost per unit for each product at this level of activity are given below Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit $ 40 34 21 29 26 29 $179 Alpha Beta S 24 28 19 32 24 $149 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.

Explanation / Answer

Alpha Beta Units (Capacity) 122000 122000 Calculation of contribution margin of Beta Sale Price 190 155 Less: Variable price Direct Material 40 24 Direct Labour 34 28 Manufacturing overhead 21 19 Selling Exp 26 22 Total variable cost 121 93 Contribution margin per unit 69 62 6. Financial disadvantage of discontinuing Beta Units (Produced & sell) 104000 Contribution margin per unit * Units produced 6448000 7. Financial disadvantage of discontinuing Beta Units (Produced & sell) 54000 Contribution margin per unit * Units produced 3348000 8. Financial Advantage /disadvantage of discontinuing Units (Produced & sell) 94000 74000 Contribution margin per unit * Units produced 6486000 4588000 Total Contribution ( Alpha + Beta) before discontinuation 11074000 Additional contribution if Beta is discontinued Additional Units (Produced & sell) 14000 966000 Total Contribution ( Alpha ) after discontinuation 5554000 Disadvantage after discontinuation of Beta 5520000

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