Required information The following information applies to the questions displaye

Question

Required information The following information applies to the questions displayed below.] Cane Company manufactures two products called Alpha and Beta that sell for $225 and $175, respectively. Eaclh product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 130,000 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 Alpha Beta $ 24 32 24 37 27 29 $ 42 42 26 34 31 $209 $173 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. 8. Assume that Cane normally produces and sells 79,000 Betas and 99,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 12,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line? Financial advantage $ 1,374,000

Explanation / Answer

Calculation of unit contribution margin for both product lines:

Alpha

Beta

Variable expenses

Direct material

$ 42

$ 24

Direct labor

$ 42

$ 32

Selling expenses

$ 31

$ 27

Total variable expenses

$ 115

$ 83

Sales

$ 225

$ 175

Less: Variable expenses

$ 115

$ 83

Unit Contribution margin

$ 110

$ 92

Calculation of profit/loss on discontinuation Beta product line:

Contribution margin lost if Beta is dropped ($92x79,000)

$ (7,268,000)

Add: Traceable fixed manufacturing overhead ($37x130,000)

$   4,810,000

Add: Contribution margin on additional Alpha sales ($110x12000)

$   1,320,000

Change in net operating income if Beta is dropped

$   (1,138,000)

Cane will suffer financial disadvantages of $ 1,138,000 on discontinuing Beta product line.

Alpha

Beta

Variable expenses

Direct material

$ 42

$ 24

Direct labor

$ 42

$ 32

Selling expenses

$ 31

$ 27

Total variable expenses

$ 115

$ 83

Sales

$ 225

$ 175

Less: Variable expenses

$ 115

$ 83

Unit Contribution margin

$ 110

$ 92

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