8. Assume that Cane normally produces and sells 62,000 Betas and 82,000 Alphas p

Question

8. Assume that Cane normally produces and sells 62,000 Betas and 82,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 17,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

Required information The Foundational 15 [LO12-2, LO12-3, LO12-4, LO12-5, LO12-6] [The following information applies to the questions displayed below., Cane Company manufactures two products called Alpha and Beta that sell for $130 and $90, respectively. Eaclh product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 102,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha Beta $10 21 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit s 25 17 18 14 17 $113 20 10 12 $80 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

Unit contribution margin Beta= 90-10-21-7-10= 42 Unit contribution margin Alpha = 130-25-22-17-14= 52 8 Loss in contribution margin -2604000 =62000*42 Avoidable fixed costs 2040000 =102000*20 Contribution margin from Alpha 884000 =17000*52 Financial advantage (disadvantage) 320000

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