Question

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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:

	Alpha				Beta
Direct materials		$	40			$	24
Direct labor			34				28
Variable manufacturing overhead			21				19
Traceable fixed manufacturing overhead			29				32
Variable selling expenses			26				22
Common fixed expenses			29				24
Total cost per unit		$	179			$	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.

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?

Answer 1

	Alpha	Beta
Selling price	190	155
Less: Variable costs
Direct materials	40	24
Direct labor	34	28
Variable manufacturing overhead	21	19
Variable selling expenses	26	22
Total Variable costs	121	93
Unit Contribution margin	69	62
Loss in Contribution margin of Beta	-4588000	=74000*62
Increase in Contribution margin of Alpha	966000	=14000*69
Avoidable Traceable fixed manufacturing overhead	3904000	=122000*32
Net change in income	282000
Financial advantage = 282000