Question

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Cane Company manufactures two products called Alpha and Beta that sell for $210 and $172, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 128,000 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			38				34
Variable manufacturing overhead			25				23
Traceable fixed manufacturing overhead			33				36
Variable selling expenses			30				26
Common fixed expenses			33				28
Total cost per unit		$	199			$	171

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 108,000 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 $81 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

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Answer 1

Answer:
Particulars	Amount (in $ )
Incremental Revenue ( 3,000 Units x $ $ 81)	$ 243,000
Less: Incremental costs:
- Direct materials           ( 3,000 Units x $ 24)	($ 72,000)
- Direct labor           ( 3,000 Units x $ 34)	($ 102,000)
- Variable manufacturing overhead           ( 3,000 Units x $ 23)	($ 69,000)
-   Variable selling expenses           ( 3,000 Units x $ 26)	($ 78,000)
Financial disadvantage of accepting the new customer's order	($ 78,000)