Cane Company manufactures two products called Alpha and Beta that sell for $125 and $85,...
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Accounting
Cane Company manufactures two products called Alpha and Beta that sell for $125 and $85, respectively. Each product uses only one type of raw material that costs $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 are given below:
Alpha
Beta
Direct materials
$ 30
$ 12
Direct labor
21
20
Variable manufacturing overhead
8
6
Traceable fixed manufacturing overhead
17
19
Variable selling expenses
13
9
Common fixed expenses
16
11
Total cost per unit
$ 105
$ 77
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 61,000 Betas and 81,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 16,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?
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