Question

Cane Company manufactures two products called Alpha and Beta that sell for $ 125 and $ 85, respectively. Each product uses only one type of raw material that costs $ 6 per pound. The company has the capacity to annually produce 101,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

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 61,000 Betas and 81,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 16.000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

Answer 1

	Alpha	Beta
Selling price	125	85
Less: Variable costs
Direct materials	30	12
Direct labor	21	20
Variable manucfaturing overhead	8	6
Variable selling expenses	13	9
Total variable costs	72	47
Unit Contribution margin	53	38
Loss in Contribution margin of Beta	-2318000	=-61000*38
Increase in Contribution margin of Alpha	848000	=16000*53
Avoidable fixed expenses	1919000	=101000*19
Net change in income	449000
Financial advantage 449000