Required information The Foundational 15 [LO12-2, LO12-3, LO12-4, LO12-5, LO12-6

Question

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

The profit impact of dropping the Beta product line is computed as follows:

Contribution margin lost if the Beta product line is dropped*......................

$(3,864,000)

Traceable fixed manufacturing overhead....................................................

2,040,000

Decrease in net operating income if Beta is dropped.........................

$(1,824,000)

* Beta’s contribution margin per unit is $40 [$90 $ (10+21+7+10) ] = $ 90- $ 48 = $42

. Therefore, the decrease in contribution margin if Beta is dropped would be $3,864,000 (92,000 units × $42).

Traceable fixed manufacturing overhead = (20*102000) =

2,040,000

Contribution margin lost if the Beta product line is dropped*......................

$(3,864,000)

Traceable fixed manufacturing overhead....................................................

2,040,000

Decrease in net operating income if Beta is dropped.........................

$(1,824,000)

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