Question

Required information [The following information applies to the questions displayed below.) Cane Company manufactures two products called Alpha and Beta that sell for $215 and $160, respectively. Each product uses only one type of raw material that costs $7 per pound. The company has the capacity to annually produce 125,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha $ 42 Beta $ 21 28 با Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit N با NWN N با 26 $190 $154 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. 5. Assume that Cane expects to produce and sell 111,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 26,000 additional Alphas for a price of $144 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 12,000 units. a. What is the financial advantage (disadvantage) of accepting the new customer's order? b. Based on your calculations above should the special order be accepted? Complete this question by entering your answers in the tabs below. Req 5A Req 5B What is the financial advantage (disadvantage) of accepting the new customer's order?

Answer 1

Solution Alpha Beta Selling price per unit $215 $160 Less: Variable cost per unit Alpha ($42+$35 $23+ $28 ($128) Beta ($21+$28+ $21 + $24) ($94) $66 Contribution margin per unit $87 Traceable fixed manufacturing O/H Alpha ($31 x 125,000) Beta ($34 x 125,000) $3,875,000 $4,250,000 Requirement 5 (a) Since the total capacity to produce the Alphas is 125,000 units, the idle capacity is 14,000 units (125,000- 111,000), if the company accepts the new customer's order of 26,0000 units, the company has to decrease the supply to the regular customer by 12,000 units so as to meet the new customer's order in full. In this case the company shall loose the contribution margin on existing 12,000 units to regular customers. The company shall accept the new customer's order only if it will result into additional profit to the Company. We shall analyze the financial advantage or disadvantage of accepting the new customer's order as under: Revenue ($144 x 26,000 units) $3,744,000 Less: Variable cost ($128 x 26,000 units) ($3,328,000) ($1,044,000) Less: Contribution margin lost on 12,000 units ($87 x 12,000 units) Financial advantage (disadvantage) of accepting the new customer's order ($628,000) Financial (disadvantage) ($628,000) Requirement 5 (b) The new customer's special order must not be accepted as it would result into net incremental loss to the company by $628,000. Requirement 6 If the product Beta is discontinued, the company shall loose the contribution margin on Beta product however the company shall be able to avoid traceable fixed manufacturing overhead, but the common fixed expenses shall not be avoided. The product Beta should be discontinued only if it results into financial advantage to the company. We shall analyze the financial advantage or disadvantage of discontinuing the Beta as under Loss of contribution margin on Beta ($66 x 106,000) ($6,996,000) Savings of traceable fixed manufacturing O/H $4,250,000 ($2,746,000) Financial advantage (disadvantage) of discontinuing the Beta product line Financial disadvantage of discontinuing the Beta is $2,746,000. Financial (disadvantage) ($2,746,000) Requirement 7 We can analyze the financial advantage (disadvantage) as under: ($3,696,000) Loss of contribution margin on Beta ($66 x 56,000) Savings of traceable fixed manufacturing O/H $4,250,000 Financial advantage (disadvantage) of discontinuing the Beta product line $554,000 If Cane normally produces and sells 56,000 Betas per year, the financial advantage of discontinuing the Beta product line is $554,000 Financial advantage $554,000 Requirement 8 We can analyze the financial advantage (disadvantage) as under: Loss of contribution margin on Beta ($66 x 76,000) $5,016,000) $4,250,000 Savings of traceable fixed manufacturing O/H on Beta Additional contribution margin on Alpha ($87 x 16,000) $1,392,000 Financial advantage (disadvantage) of discontinuing the Beta product line $626,000 If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 16,000 units, the financial advantage of discontinuing the Beta product line is $626,000. Financial advantage $626,000