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 is given below:
Alpha Beta
Direct materials $ 30 $ 18
Direct labor 30 25
Variable manufacturing overhead 20 15
Traceable fixed manufacturing overhead 26 28
Variable selling expenses 22 18
Common fixed expenses 25 20
Total cost per unit $ 153 $ 124
The company’s traceable fixed manufacturing overhead is avoidable, whereas its common fixed expenses are unavoidable and have been allocated to products based on sales dollars.
Foundational 13-6 (Algo)
6. Assume Cane normally produces and sells 100,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?