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Cane Company manufactures two products called Alpha and Beta that sell for $135 and $95, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 105,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha Beta Direct materials $ 30 $ 18 Direct labor 23 16 Variable manufacturing overhead 10 8 Traceable fixed manufacturing overhead 19 21 Variable selling expenses 15 11 Common fixed expenses 18 13 Total cost per unit $ 115 $ 87 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. 6. Assume that Cane normally produces and sells 93,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line

Answer :

jepessoa

Answer:

financial disadvantage = ($1,953,000)

Explanation:

Alpha selling price $135 per unit

Beta selling price $95 per unit

raw materials = $6 per pound

production capacity 105,000 of each product

                                                                         Alpha              Beta

Direct materials                                                $30                 $18

Direct labor                                                       $23                 $16

Variable manufacturing overhead                  $10                   $8

Traceable fixed manufacturing overhead      $19                 $21

Variable selling expenses                               $15                  $11

Common fixed expenses                                $18                  $13

Total cost per unit                                           $115                $87

margin per unit                                                $20                  $8

93,000 Betas produced per year:

total revenue                      $8,835,000

COGS                                ($5,859,000)

Gross profit                        $2,976,000

Variable selling expense ($1,023,000)

Fixed common expenses ($1,209,000)

net profit                               $744,000

if the Beta product line is discontinued:

lost net profits                        ($744,000)

fixed common expenses    ($1,209,000)

financial disadvantage        ($1,953,000)

If the company decides to shut down the production of Betas, then it will lose $1,953,000. This includes lost profits generated by the product and unavoidable fixed costs which must be allocated to Alphas.

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