Required information [The following information applies to the questions display

Question

Required information [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: Beta $ 24 19 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit Alpha $ 40 34 21 29 26 29 $179 32 22 24 $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. 7. Assume that Cane normally produces and sells 54,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line? Financial advantage o $1,118,000 X

Explanation / Answer

Beta variable costs per unit = Direct materials + Direct labour + Variable manufacturing overhead + Variable selling expenses

= 24 + 28 + 19 + 22

= 93

Beta selling price per unit = 155

Beta contribution margin per unit = Beta selling price per unit - Beta variable costs per unit

= 155 - 93 = 62

Beta Contribution Margin lost = 54,000 Units * 62 per unit

= 3,348,000

Traceable fixed manufacturing overhead = 32 per unit * 122,000 units

= 3,904,000

Contribution margin lost (3,348,000) Savings from avoidable fixed costs : Traceable fixed manufacturing overhead 3,904,000 Financial advantage 556,000

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