Question

Cane Company manufactures two products called Alpha and Beta that sell for $190 and $155, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 122,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	40			$	24
Direct labor			34				28
Variable manufacturing overhead			21				19
Traceable fixed manufacturing overhead			29				32
Variable selling expenses			26				22
Common fixed expenses			29				24
Total cost per unit		$	179			$	149

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.

4. Assume that Cane expects to produce and sell 104,000 Betas during the current year. One of Cane’s sales representatives has found a new customer who is willing to buy 3,000 additional Betas for a price of $62 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

Answer 1

Answer:

Financial disadvantage = $ 93,000

Calculations:

Units	3,000
	Amount $
Incremental Revenues	$     186,000
Variable Costs:
Direct material	$       72,000
Direct labor	$       84,000
Variable manufacturing overheads	$       57,000
Variable selling expenses	$       66,000
Total Variable Costs	$     279,000
Net income	$     (93,000)

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