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[The following information applies to the questions displayed below.] Cane Company manufactures two products called Alpha...

[The following information applies to the questions displayed below.]

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?

Homework Answers

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
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