7 The folowing information applies to the questions displayed below Cane Company

Question

7 The folowing information applies to the questions displayed below Cane Company manufactures two products called Alpha and Beta that sell for $150 and $110, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 108,000 units of each product. Its average cost per unit for each product at this level of activity are given below Part 7 of 15 Alpha Beta s 15 Direet materials Direct labor Variable manufacturing overhead Traceable fixed nanufacturing overhead variable selling expenses Conmon fixed expenses Total cost per unit 0.26 points s 30 26 13 24 14 16 18 $130 $102 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 7. Assume that Cane normally produces and sells 46,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line? Financial (disadvantage) Financial advantage

Explanation / Answer

Beta

Selling price = 110 and variable cost = Material + Lab + variable MOH + variable Sellling exp = 62

So contribution = 110 - 62 = 48.

If beta product line is discountinue, we have a contribution loss of 48 * 46000 units = 2208000

But we can save traceble fixed cost worth 24* 108000 = 2592000

Thus we have financial advantage of discontinuing Beta = 384000 ( 2592000 - 2208000)

Financial advantage = 384000

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