Question

Assume that Cane normally produces and sells 75,000 Betas and 95,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 15,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?

Answer 1

Profit increases by $420,000

Step-by-step explanation:

The profit impact of dropping the Beta product line is computed as follows:

Contribution margin lost if the Beta product line is dropped$(3,780,000)

Traceable fixed manufacturing overhead3,248,000

Contribution margin on additional Alpha sales*952,000

Increase in net operating income if Beta is dropped$420,000

*Alpha’s contribution margin per unit is $68 ($170 − $102).

Therefore, the increase in Alpha’s contributionmargin if Beta is dropped would be $1,020,000 (15,000 units × $68).