Question

Cane Company manufactures two products called Alpha and Beta that sell for $125 and $85, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 101,000 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 21 20
Variable manufacturing overhead 8 6
Traceable fixed manufacturing overhead 17 19
Variable selling expenses 13 9
Common fixed expenses 16 11
Total cost per unit $105 $77

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.

Questions: 5. Assume that Cane expects to produce and sell 96,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 11,000 additional Alphas for a price of $84 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 6,000 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:

disadvatageous for 126,000 dollars

It should be rejected.

Explanation:

$\left[\begin{array}{cccc}& Units& Cost& Total\\ Special Order&11,000&84&924,000\\ Variable Cost&11,000&-60&-660,000\\ Rejected local&-6000&65&-390,000\\Net Income&&&-126,000\\\\\end{array}\right]$

The units will generate revenue for 924,000

but will take variable cost for 60 units each thus: 660,000 cost

Also accepting this order has the opportunity cost of resing to the contribution of 6,000 units in the local market:

normal contribution: 125 - 60 = 65

opportunity cost: 6,000 x 65 = 390,000

This makes the order disadvatageous for 126,000 dollars