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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.

5. Assume that Cane expects to produce and sell 113,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 28,000 additional Alphas for a price of $152 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 13,000 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

Answer 5

a.

Financial disadvantage

$     469,000

b.

No. The offer should not be accepted as there is a loss of $ 469,000.

Note:

Units	28000
	Accept order
Incremental Revenues	$ 4,256,000
Variable Costs:
Direct material	$ 1,120,000
Direct labor	$ 1,064,000
Variable manufacturing overheads	$     700,000
Variable selling expenses	$     840,000
Contribution lost	$ 1,001,000
Total Costs	$ 4,725,000
Financial advantage	$   (469,000)
or,
Financial disadvantage	$     469,000

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