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