Question

Cane Company manufactures two products called Alpha and Beta that sell for $155 and $115, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 110,000 units of each product. Its average cost per unit for each product at this level of activity are given below: AlphaBeta Direct materials $24 $12 Direct labor 23 26 Variable manufacturing overhead 22 12 Traceable fixed manufacturing overhead 23 25 Variable selling expenses 19 15 Common fixed expenses 22 17 Total cost per unit $133 $107 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 97,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line

Answer 1

-$2,100,000

Step-by-step explanation:

The computation of the financial advantage or disadvantage is shown below

= Fixed costs avoided - contribution margin lost

where,

Fixed cost avoided is

= 110,000 units × $25

= $2,750,000

And, the contribution margin lost is

= (Selling price per unit - direct material per unit - direct labor per unit - variable manufacturing overhead per unit - Variable selling expenses per unit) × normally production & sales units

= ($115 - $12 - $26 - $12 - $15) × 97,000

= $4,850,000

So, the financial disadvantage is

= $2,750,000 - $4,850,000

= -$2,100,000