The following information applies to the questions displayed below.] Cane Compan

Question

The following information applies to the questions displayed below.] Cane Company manufactures two products called Alpha and Beta that sell for $225 and $175, respectively Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 130,000 units of each product. Its unit costs for each product at this level of activity are given below Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Alpha Beta $42$24 32 24 37 27 29 26 34 31 34 Total cost per unit $209$173 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

Explanation / Answer

6.

Contribution margin lost if the Beta product line is dropped*......................

$(7,412,000)

Traceable fixed manufacturing overhead....................................................

4,810,000 (130000*$377)

Decrease in net operating income if Beta is dropped.........................

$(2,602,000)

* Beta’s contribution margin per unit is $68 [$175 (24+32+24+27)]

. Therefore, the decrease in contribution margin if Beta is dropped would be $7,412,000 (109,000 units × $68).

Contribution margin lost if the Beta product line is dropped*......................

$(7,412,000)

Traceable fixed manufacturing overhead....................................................

4,810,000 (130000*$377)

Decrease in net operating income if Beta is dropped.........................

$(2,602,000)

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