ane 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.
!
8. Assume that Cane normally produces and sells 62,000 Betas and 82,000
Alphas per year. If Cane discontinues the Beta product line, its sales
representatives could increase sales of Alpha by 17,000 units. What is the financial
advantage (disadvantage) of discontinuing the Beta product line?
Cane Company, a manufacturer of two products – Alpha and Beta, is faced with the decision of whether to discontinue the production of the Beta product line. This decision is crucial as it could potentially impact the company’s financial performance. To make an informed choice, it’s important to assess the financial advantage or disadvantage of discontinuing the Beta product line.
Alpha and Beta are two distinct products manufactured by Cane Company. Alpha is priced at $130 per unit, while Beta is priced at $90 per unit. Both products use the same raw material costing $5 per pound, and the company has the capacity to produce 102,000 units of each product annually.
The cost structure for both products comprises various components, including direct materials, direct labor, variable manufacturing overhead, traceable fixed manufacturing overhead, variable selling expenses, and common fixed expenses. The cost per unit for Alpha and Beta are $113 and $80, respectively.
The decision to discontinue the Beta product line hinges on a thorough evaluation of its impact on the company’s financial performance. Currently, Cane Company sells 62,000 units of Beta and 82,000 units of Alpha per year. If the Beta product line is discontinued, the company’s sales representatives could potentially increase sales of Alpha by 17,000 units.
Financial Impact Analysis: To determine the financial advantage or disadvantage of discontinuing the Beta product line, we need to calculate the incremental contribution to profit.
Current Situation (Both Products Being Sold): Total revenue from Alpha: 82,000 units * $130 = $10,660,000 Total revenue from Beta: 62,000 units * $90 = $5,580,000 Total contribution margin: ($10,660,000 – $113 * 82,000) + ($5,580,000 – $80 * 62,000) = $1,847,000
If Beta Product Line is Discontinued: Total revenue from Alpha: (82,000 + 17,000) units * $130 = $14,690,000 Total contribution margin: ($14,690,000 – $113 * 99,000) = $2,348,770
The financial advantage of discontinuing the Beta product line can be calculated as the difference in contribution margin between the two scenarios:
Advantage = Contribution Margin (Discontinued Beta) – Contribution Margin (Both Products Sold) Advantage = $2,348,770 – $1,847,000 = $501,770
Based on the financial analysis, discontinuing the Beta product line would result in a financial advantage of $501,770 for Cane Company. This indicates that the company stands to gain by focusing its resources and sales efforts on the Alpha product line. However, it’s essential for Cane Company to consider other strategic factors such as market demand, customer preferences, and the long-term impact on its product portfolio before finalizing this decision.
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