Question

Required information The following information applies to the questions displayed below.] Cane Company manufactures two products called Alpha and Beta that sell for $180 and $145, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 118,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha $ 36 Beta $ 24 27 17 32 19 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit 27 22 $140 $165 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 102,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line? Financial (disadvantage) $(2,628,000)

Answer 1

Solution 6:

Differential Analysis - Sale Beta (102000 units) (alt 1) or Discontinue Beta (Alt2)
Particulars	Sale Beta (102000 Units) (Alt 1)		Discontinue Beta (Alt 2)		Differential effect on income (Alt 2)
	Details	Amount	Details	Amount
Revenue	102000*$145	$14,790,000.00		$0.00	-$14,790,000.00
Costs:
Direct Material	102000*$24	$2,448,000.00		$0.00	-$2,448,000.00
Direct Labor	102000*$27	$2,754,000.00		$0.00	-$2,754,000.00
Variable manufacturing Overhead	102000*$17	$1,734,000.00		$0.00	-$1,734,000.00
Variable Selling Expenses	102000*$20	$2,040,000.00		$0.00	-$2,040,000.00
Traceable Fixed manufacturing overhead	118000*$30	$3,540,000.00		$0.00	-$3,540,000.00
Common fixed expenses	118000*$22	$2,596,000.00	118000*$22	$2,596,000.00	$0.00
Income / (Loss)		-$322,000.00		-$2,596,000.00	-$2,274,000.00

solution 7:

Differential Analysis - Sale Beta (52000 units) (alt 1) or Discontinue Beta (Alt2)
Particulars	Sale Beta (52000 Units) (Alt 1)		Discontinue Beta (Alt 2)		Differential effect on income (Alt 2)
	Details	Amount	Details	Amount
Revenue	52000*$145	$7,540,000.00		$0.00	-$7,540,000.00
Costs:
Direct Material	52000*$24	$1,248,000.00		$0.00	-$1,248,000.00
Direct Labor	52000*$27	$1,404,000.00		$0.00	-$1,404,000.00
Variable manufacturing Overhead	52000*$17	$884,000.00		$0.00	-$884,000.00
Variable Selling Expenses	52000*$20	$1,040,000.00		$0.00	-$1,040,000.00
Traceable Fixed manufacturing overhead	118000*$30	$3,540,000.00		$0.00	-$3,540,000.00
Common fixed expenses	118000*$22	$2,596,000.00	118000*$22	$2,596,000.00	$0.00
Income / (Loss)		-$3,172,000.00		-$2,596,000.00	$576,000.00

Solution 15:

Computation of contribution margin per pound
Particulars	Alpha	Beta
Selling price per unit	$180.00	$145.00
Variable cost per unit:
Direct material	$36.00	$24.00
Direct labor	$32.00	$27.00
Variable manufacturing overhead	$19.00	$17.00
Variable selling expenses	$24.00	$20.00
Contribution margin per unit	$69.00	$57.00
Raw material required per unit (In pound)	6	4
Contribution margin per pound of material	$11.50	$14.25
Rank	2	1

As current available material is sufficient to meet total demand of Beta product. Therefore extra material will be utilized in production of Alpha Product.

Therefore maximum price that Cane company is willing to pay for additional pound of material = Regular price + Contribution margin per pound of alpha = $6 + $11.50 = $17.50