Question

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 average cost per unit for each product at this level of activity are given below Alpha Beta $ 24 32 24 37 27 29 $173 $ 42 42 26 34 31 34 $209 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit 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 79,000 Betas and 99,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 12,000 units What is the financial advantage (disadvantage) of discontinuing the Beta product line?

Answer 1

Solution:

	Alpha	Beta	Total	Alpha only
Units Sold	79000	99000	178000	111000
Sales	17775000	17325000	35100000	24975000
Variable Costs:
Direct Material	3318000	2376000	5694000	4662000
Direct Labour	3318000	3168000	6486000	4662000
Variable Manufacturing Overhead	2054000	2376000	4430000	2886000
Variable selling Expense	2449000	2673000	5122000	3441000
Total Variable Costs	11139000	10593000	21732000	15651000
Contribution Margin	6636000	6732000	13368000	9324000
Fixed Costs:
Traceable Fixed Manufacturing Overhead	2686000	3663000	6349000	3774000
Common Fixed Expenses- Allocated	4147500	4042500	8190000	8190000
Total Fixed Cost	6833500	7705500	14539000	11964000
Net Profit (loss)	(197500)	(973500)	(1171000)	(2640000)

Net loss in Alpha alone is $264000, while in total it is $1171000.So the financial disadvantage is that company's loss will increase by $1469000.

Notes: Each and every cost is multiplied by per unit cost by units sold except common fixed expenses(130,000 units x ($34+$29))=$8190000 which is allocated in the ratio of sales figure:

Alpha = 819000 x {17775000/(17775000+17325000)}=$4147500

Beta = 819000 x {17325000/(17775000+17325000)}=$4042500