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The Foundational 15 (Algo) [LO11-2, LO11-3, LO11-4, LO11-5, LO11-6]

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Cane Company manufactures two products called Alpha and Beta that sell for \[tex]$125 and \$[/tex]85, respectively. Each product uses only one type of raw material that costs \[tex]$6 per pound. The company has the capacity to annually produce 101,000 units of each product. Its average cost per unit for each product at this level of activity is given below:

\begin{tabular}{lrr}
& Alpha & Beta \\
\hline
Direct materials & \$[/tex]6 & \[tex]$6 \\
Direct labor & \$[/tex]30 & \[tex]$12 \\
Variable manufacturing overhead & \$[/tex]21 & \[tex]$20 \\
Traceable fixed manufacturing overhead & \$[/tex]8 & \[tex]$6 \\
Variable selling expenses & \$[/tex]17 & \[tex]$19 \\
Common fixed expenses & \$[/tex]13 & \[tex]$9 \\
\hline
Total cost per unit & \$[/tex]95 & \[tex]$72 \\
\end{tabular}

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 11-6 (Algo)

Assume Cane normally produces and sells 91,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

\begin{tabular}{|l|r|}
\hline
Financial (disadvantage) & \$[/tex](1,729,000) \\
\hline
\end{tabular}



Answer :

GinnyAnswer
Certainly! Let's break down the solution step by step to determine the financial impact of discontinuing the Beta product line.

### Step 1: Calculate the Contribution Margin per Unit of Beta
The contribution margin per unit is calculated as the selling price minus all variable costs per unit.
[tex]\[ \text{Contribution Margin per Unit} = \text{Selling Price} - (\text{Direct Materials} + \text{Direct Labor} + \text{Variable Manufacturing Overhead} + \text{Variable Selling Expenses}) \][/tex]

Given the data:
- Selling Price of Beta: \[tex]$85 - Direct Materials: \$[/tex]6
- Direct Labor: \[tex]$12 - Variable Manufacturing Overhead: \$[/tex]20
- Variable Selling Expenses: \[tex]$19 Calculate the contribution margin per unit: \[ \text{Contribution Margin per Unit} = 85 - (6 + 12 + 20 + 19) = 85 - 57 = 28 \] So, the contribution margin per unit of Beta is \$[/tex]28.

### Step 2: Calculate the Total Contribution Margin Lost from Discontinuing Beta
Next, determine the total contribution margin lost if Beta is discontinued. Multiply the contribution margin per unit by the number of units sold annually.

Given:
- Units Sold of Beta: 91,000

[tex]\[ \text{Total Contribution Margin Lost} = \text{Contribution Margin per Unit} \times \text{Units Sold} \][/tex]
[tex]\[ \text{Total Contribution Margin Lost} = 28 \times 91,000 = 2,548,000 \][/tex]

So, the total contribution margin lost is \[tex]$2,548,000. ### Step 3: Calculate Traceable Fixed Manufacturing Overhead Saved The traceable fixed manufacturing overhead is avoidable if the Beta product line is discontinued. Multiply the fixed overhead per unit by the number of units sold. Given: - Traceable Fixed Manufacturing Overhead of Beta: \$[/tex]6
- Units Sold of Beta: 91,000

[tex]\[ \text{Fixed Manufacturing Overhead Saved} = \text{Traceable Fixed Manufacturing Overhead per Unit} \times \text{Units Sold} \][/tex]
[tex]\[ \text{Fixed Manufacturing Overhead Saved} = 6 \times 91,000 = 546,000 \][/tex]

So, the traceable fixed manufacturing overhead saved is \[tex]$546,000. ### Step 4: Determine the Financial Impact Finally, calculate the overall financial impact of discontinuing the Beta product line. Subtract the fixed manufacturing overhead saved from the total contribution margin lost. \[ \text{Financial Impact} = -\text{Total Contribution Margin Lost} + \text{Fixed Manufacturing Overhead Saved} \] \[ \text{Financial Impact} = -2,548,000 + 546,000 = -2,002,000 \] So, the financial impact (disadvantage) of discontinuing the Beta product line is \$[/tex]-2,002,000 or a \[tex]$(2,002,000) disadvantage. Therefore, discontinuing the Beta product line would result in a financial disadvantage of \$[/tex](2,002,000).

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