Question

Pole Company manufactures two products called Tap and Bounce that sell for $360 and $240, respectively. Each product uses only one type of raw material that costs $18 per pound. The company has the capacity to annually produce 300,000 units of each product. Its unit costs for each product at this level of activity are given below:

Tap      Bounce

Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . . .     $ 90     $36

Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    60        45

Variable manufacturing overhead. . . . . . . . . . . . .     21        15

Traceable fixed manufacturing overhead. . . . . . .      48        54

Variable selling expenses. . . . . . . . . . . . . . . . . . .      36        24

Common fixed expenses. . . . . . . . . . . . . . . . . . . .     45        30

Total cost per unit. . . . . . . . . . . . . . . . . . . . . . . . . .    $300    $204

The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are deemed unavoidable and have been allocated to products based on sales dollars.

Required:

Assume that Pole normally produces and sells 120,000 Bounces per year. If Pole discontinues the Bounce product line, how much will profits increase or decrease?

Answer 1

Solution:

Computation of the Profit Impact of Droping bouncers product line is as follows -

Working Notes:

(1) : Computation of Bouncers Contribution Margin per unit -

Contribution Margin per unit = Sales per unit - Variable cost per unit

= $240 - $(36+45+15+24)

= $240 - $120

= $120 per unit .

Therefore Contribution Margin per unit = $120 per unit

(2) : Computation of Traceable Fixed Manufacturing Overhead -

Traceable Fixed Manufacturing Overhead = units produced * Traceable fixed manufacturing overhead unit

= 3,00,000 * $54

= $162,00,000

Therefore Traceable Fixed Manufacturing Overhead = $162,00,000