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
<u>common fixed expenses $34 $29 </u>
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.
