6 Coase Com pany manufactures two products called Omega and Epsilon that seli fo

Question

6 Coase Com pany manufactures two products called Omega and Epsilon that seli for $215 and $140, respectively. The company has the capacity to annually produce 10,000 units of each product. Its unit costs for each product a this capacity level of activity are given below Omega Epsilon Variable manufacturing cost Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit S100 31 28 $70 32 24 26 S152 S190 The company considers rhead to be avoidable, whereas its common f expenses are deemed unavoidable and have been allocated to products based on sales dollars. its traceable fixed manufacturing ove Suppose Coase normally produces and sells 8,500 Omegas and 7,000 Epsilons per year. If Coase discon Epsilon product line, its sales representatives could increase sales of Omega by 1,400 units. What is the advantage (disadvantage) of discontinuing the Epsilon product line? A. Coase's net operating income will decrease by $ 119.800 B. Coase's net operating income will decrease by 200,200 C. Coase's net operating income will increase by S 119,800 D. Coase's net operating income will increase by S 200,200 E. None of the above

Explanation / Answer

Option c is correct

Coase net operating income will increase by $119,800.

Explanation:

contribution margin per unit=(sales price -variable cost)per unit

Omega contribution margin per unit=$215-$100-$28

=$87 per unit

Epsilon contribution margin per unit=$140-$70-$24

=$46 per unit

Profit impact of dropping Epsilon product line:

Contribution margin lost if Epsilon product line dropped(7000 units×$46) (322,000) Traceable fixed manufacturing overhead(10000×$32) $320,000 Contribution margin on additional Omega sales(1400×$87) $121,800 Increase in net operating income if Epsilon is dropped $119,800

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