Cane Company manufactures two products called Alpha and Beta that sell for $150 and $105, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 107,000 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 $ 10 Direct labor 25 20 Variable manufacturing overhead 12 10 Traceable fixed manufacturing overhead 21 23 Variable selling expenses 17 13 Common fixed expenses 20 15 Total cost per unit $ 125 $ 91 The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are unavoidable and have been allocated to produc
Cane Company manufactures two products called Alpha and Beta that sell for $150 and $105, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 107,000 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 | $ 10 |
| Direct labor | 25 | 20 |
| Variable manufacturing overhead | 12 | 10 |
| Traceable fixed manufacturing overhead | 21 | 23 |
| Variable selling expenses | 17 | 13 |
| Common fixed expenses | 20 | 15 |
| Total cost per unit | $ 125 | $ 91 |
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.
1. Assume that Cane normally produces and sells 45,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?
2. Assume that Cane normally produces and sells 65,000 Betas and 85,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 20,000 units. What is the financial advantage (disadvantage) of discontinuing the Beta product line?
3. Assume that Cane expects to produce and sell 85,000 Alphas during the current year. A supplier has offered to manufacture and deliver 85,000 Alphas to Cane for a price of $100 per unit. What is the financial advantage (disadvantage) of buying 85,000 units from the supplier instead of making those units?
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