Question

Required information [The following information applies to the questions displayed below.) Cane Company manufactures two products called Alpha and Beta that sell for $170 and $130, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 116,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha $ 30 Beta $ 18 30 20 15 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit 22 25 $ 153 28 18 20 $ 124 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 105,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 20,000 additional Alphas for a price of $120 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 9,000 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?

5. Assume that Cane expects to produce and sell 105,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 20,000 additional Alphas for a price of $120 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 9,000 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?

Answer 1

Direct materials	30
Direct labor	30
Variable manufacturing overhead	20
Variable selling expenses	22
Unit variable cost	102
Incremental revenue from sales	2400000	=20000*120
Less : Incremental costs	2040000	=20000*102
Less : Opportunity cost of existing sales	612000	=9000*(170-102)
Net change in income	-252000
a
Financial (disadvantage) (252000)
b
The special order should not be accepted
Accepting order would decrease income by $252000