Question

Cane Company manufactures two products called Alpha and Beta that sell for $130 and $90, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 102,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	25			$	10
Direct labor			22				21
Variable manufacturing overhead			17				7
Traceable fixed manufacturing overhead			18				20
Variable selling expenses			14				10
Common fixed expenses			17				12
Total cost per unit		$	113			$	80

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.

Assume that Cane normally produces and sells 92,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

Assume that Cane normally produces and sells 42,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

Answer 1

Answer 1

Financial disadvantage

$                      1,824,000

Calculations:

	Amount	Calculation
Units produced	92,000.00
Loss of Sales	$                      8,280,000	92,000*90
Savings in Cost	$                      4,416,000	92,000*48
Savings in Fixed cost	$                      2,040,000
Financial disadvantage	$                      1,824,000

Answer 2

Financial advantage

$ 276,000

Calculations:

	Amount	Calculation
Units produced	42,000.00
Loss of Sales	$                      3,780,000	42,000*90
Savings in Cost	$                      2,016,000	42,000*48
Savings in Fixed cost	$                      2,040,000
Financial advantage	$ 276,000

In case of any doubt, please comment.