Question

8. Assume that Cane normally produces and sells 70,000 Betas and 90,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 14,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

Required information [The following information applies to the questions displayed below.) Cane Company manufactures two products called Alpha and Beta that sell for $170 and $130, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 116,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha $ 30 Beta $ 18 30 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit 26 22 25 $ 153 20 $ 124 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. 8. Assume that Cane normally produces and sells 70,000 Betas and 90,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 14,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

Answer 1

Solution:

Differential Analysis - Sale Alpha (90000 Units), Beta (70000 Units) (Alt 1) or Discontinue Beta & Sale Alpha (104000 Units) (Alt 2)
Particulars	Sale Alpha (90000 Units), Beta (70000 Units) (Alt 1)		Discontinue Beta & Sale Alpha (104000 Units) (Alt 2)		Differential effect on income (Alt 2)
	Details	Amount	Details	Amount
Revenue	(90000*$170) + (70000*$130)	$2,44,00,000.00	104000*$170	$1,76,80,000.00	-$67,20,000.00
Costs:
Direct Material	(90000*$30) + (70000*$18)	$39,60,000.00	104000*$30	$31,20,000.00	$8,40,000.00
Direct Labor	(90000*$30) + (70000*$25)	$44,50,000.00	104000*$30	$31,20,000.00	$13,30,000.00
Variable manufacturing Overhead	(90000*$20) + (70000*$15)	$28,50,000.00	104000*$20	$20,80,000.00	$7,70,000.00
Variable Selling Expenses	(90000*$22) + (70000*$18)	$32,40,000.00	104000*$22	$22,88,000.00	$9,52,000.00
Traceable Fixed manufacturing overhead	(116000*$26) + (116000*$28)	$62,64,000.00	116000*$26	$30,16,000.00	$32,48,000.00
Common fixed expenses	(116000*$25) + (116000*$20)	$52,20,000.00	(116000*$25) + (116000*$20)	$52,20,000.00	$0.00
Income / (Loss)		-$15,84,000.00		-$11,64,000.00	$4,20,000.00

Financial advantage = $420,000