Question
Cane Company manufactures two products called Alpha and Beta that sell for $240 and $162, respectively. Each product uses only one type of raw material
Cane Company manufactures two products called Alpha and Beta that sell for $240 and $162, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 131,000 units of each product. Its unit costs for each product at this level of activity are given below: |
Alpha | Beta | |||||||
Direct materials | $ | 35 | $ | 15 | ||||
Direct labor | 48 | 23 | ||||||
Variable manufacturing overhead | 27 | 25 | ||||||
Traceable fixed manufacturing overhead | 35 | 38 | ||||||
Variable selling expenses | 32 | 28 | ||||||
Common fixed expenses | 35 | 30 | ||||||
Total cost per unit | $ | 212 | $ | 159 | ||||
The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are deemed unavoidable and have been allocated to products based on sales dollars. |
6. | Assume that Cane normally produces and sells 110,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?
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