Question

Cane company manufactures two products called alpha and beta that sell for $225 and $175, respectively. each product uses only one type of raw material that costs $6 per pound. the company has the capacity to annually produce 130,000 units of each product. its unit costs for each product at this level of activity are given below: alpha beta direct materials $ 42 $ 24 direct labor 42 32 variable manufacturing overhead 26 24 traceable fixed manufacturing overhead 34 37 variable selling expenses 31 27 common fixed expenses 34 29 total cost per unit $ 209 $ 173 the company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are deemed unavoidable and have been allocated to products based on sales dollars.

Answer 1

Answer:

The special order should be rejected since it decreases net profit.  

Explanation:

Alpha = $225

Beta = $175

total production capacity = 130,000 pounds

raw materials = $6 per pound

Production costs per unit                        Alpha                Beta

direct materials                                          $42                   $24

direct labor                                                 $42                   $32

variable manufacturing overhead            $26                   $24  

fixed manufacturing overhead                 $34                   $37

variable selling expenses                         $31                    $27

common fixed expenses                          $34                   $29  

total cost per unit                                    $209                 $173

Cane expects to sell 114,000 Alphas.

Net profit = (114,000 x $225) - (114,000 x $209) = $25,650,000 - $23,826,000 = $1,824,000

If the new sales order is accepted, Cane's revenue will increase to:

• 101,000 x $225 = $22,725,000
• 29,000 x $156 = $4,524,000
• total = $27,249,000

Their total cost will by:

• 114,000* x $209 = $23,826,000
• 16,000 x ($209 - $34 avoidable fixed costs) = $2,800,000
• total = $26,626,000

*This sale increases the output, but previous costs cannot be avoided.

Net profit with special order = $27,249,000 - $26,626,000 = $623,000

The special order should be rejected since it decreases net profit.