Question

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.
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

Answer:

a. The financial disadvantage of accepting the new customer’s order = $ 145,000

b. The special order should NOT be accepted.

Calculations:

Particulars	Amount
Sales	$      800,000.00
Less: Variable cost
Direct Material	$      300,000.00
Direct Labor	$      200,000.00
Variable manufacturing overheads	$         70,000.00
Variable selling overheads	$      120,000.00
Gross benefit	$      110,000.00
Less: Contribution lost (120-30-20-7-12)*5000	$      255,000.00
Net benefit / (loss)	$     (145,000.00)

In case of any doubt, please comment.