Question

[The following information applies to the questions displayed below.] Cane Company manufactures two products called Alpha and Beta that sell for $120 and $80, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 100,000 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 $ 12 Direct labor 20 15 Variable manufacturing overhead 7 5 Traceable fixed manufacturing overhead 16 18 Variable selling expenses 12 8 Common fixed expenses 15 10 Total cost per unit $ 100 $ 68 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. Foundational 12-5 5. Assume that Cane expects to produce and sell 95,000 Alphas during the current year. One of Cane’s sales representatives has found a new customer who is willing to buy 10,000 additional Alphas for a price of $80 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 5,000 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

Common fixed costs are allocated and hence, irrelevant for decision making. The traceable fixed costs are only avoidable when there is no production at all. Hence this also isn't relevant for decision making.

The contribution from selling first 90,000 units will remain the same. So anything above this will consider for computation . Hence ($)

	When order is not accepted	When order is accepted
Selling price per unit	120	80
Less: Variable cosy pet unit	69	69
Contribution per Unit	51	11
No of units to be sold (above 90,000)	5000	10,000
Total additional contribution	255,000	110,000

Financial Disadvantage => 255,000-110,000 = $ 145,000.

Since special order results in financial disadvantage, the same shall not be accepted.