Question


Cane Company manufactures two products called Alpha and Beta that sell for $175 and $135, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 117,000 units of each product. Its average cost per unit for each product at this level of activity are given below:


AlphaBeta
Direct materials
$40

$15
Direct labor

30


30
Variable manufacturing overhead

18


16
Traceable fixed manufacturing overhead

26


29
Variable selling expenses

23


19
Common fixed expenses

26


21
Total cost per unit
$163

$130

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.

3. Assume that Cane expects to produce and sell 91,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 21,000 additional Alphas for a price of $124 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

Homework Answers

Answer #1
3 Financial advantage (disadvantage) = $          273,000
Workings:
Incremental Sales (21000 X $124) = $        2,604,000
Less: Incremental Variable costs [( $40+ $30 + $18 + $23) X 21000] = $        2,331,000
Increase / (decrease) in profit = $          273,000

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