Chapter 12 Problem 3 Ace Company manufactures two products called A and B that s

Question

Chapter 12 Problem 3 Ace Company manufactures two products called A and B that sell for $100 and $60 respectively. Each product uses only one type of raw material that cost $5 per pound. Ace has the capacity to annually produce 100,000 units of each product. The unit cost for each product at this level of capacity is given below: 10 Direct Material Direct Labor Variable Manufacturing Overhead10 Traceable Fixed Overhead Variable Selling expenses Common Fixed Overhead 25 15 15 10 Total Cost per Unit $90.62 $49.38 Aceconsiders its tracea ble fixed manufacturing overhead to be avoidable, but its common fixed expenses are deemed unavoida ble. The common fixed expenses have been allocated to products based on sales dollars. Answer each question independently unless instructed otherwise. Use an excel format to answer each question. The economy is in a slump; unit salesaredown. Cane forecasts unit sales for 50,000 alphas and 25,000 Betas Cane is contemplating closing the Beta line 1. A. Assume that the selling price of beta units is reduced to $50 and fixed costs traceable to the beta line are $550,000. If the beta line is discontinued what will be the product line segment margin? What will be the net operating income for Cane? Note: when computing the Product Line Segment Margin, common fixed expenses are not allocated to the product lines; use exhibit 12-4, page S42 for an example to compute the product line segment margin. 2. Refer to 1 above. If the beta line is discontinued alpha unit sales will be reduced 5%, what will be the product line segment margin if the beta line is discontinued; what will be the net operating income?

Explanation / Answer

1) Product Line segment margin Sales: 25,000 x $50 $1,250,000 Less: Direct Material -$250,000 Direct Labor -$250,000 Variable Manufacturing Overhead -$125,000 Variable selling expenses -$125,000 Product Line segment margin $500,000 profit impact of dropping the Beta product line is computed as follows: Contribution margin lost if the Beta product line is dropped -$750,000 Traceable fixed manufacturing overhead $550,000 Decrease in net operating income if Beta is dropped -$200,000 Beta’s contribution margin per unit is $30 ($60 $30). Therefore, the decrease in contribution margin if Beta is dropped would be $750,000 (25,000 units × $30) b. Product Line segment margin Sales: 25,000 x $50 $1,250,000 Less: Direct Material -$250,000 Direct Labor -$250,000 Variable Manufacturing Overhead -$125,000 Variable selling expenses -$125,000 Product Line segment margin $500,000 profit impact of dropping the Beta product line is computed as follows: Contribution margin lost if the Beta product line is dropped -$750,000 Traceable fixed manufacturing overhead $550,000 Contribution margin on Additional Alpha sales $200,000 Decrease in net operating income if Beta is dropped $0 Alpha’s contribution margin per unit is $40 (($100 $60). Therefore, the increase in Alpha’s contribution margin if Beta is dropped would be $200,000 (5,000 units × $40).

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