Question

Assume that Cane expects to produce and sell 88,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 18,000 additional Alphas for a price of $112 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

Answer 1

Answer:

Advantage = $360,000

Explanation:

Since fixed costs cannot be changed, it is unavoidable or irrelevant.

We have to deduct the avoidable expenses from the revenue to find whether Cane accepts the order or not.

Revenue ($112 x 18,000 units) =                                           $2,016,000

Less: Relevant Costs (Product costs)

Direct Material      $30 x 18,000 =                            $540,000

Direct Labor          $22 x 18,000 =                            $396,000

Variable Manufacturing Overhead   $20*18,000 = $360,000

Variable Selling expenses                $20*18,000 = $360,000

Total Relevant costs                                                            $(1,656,000)

Financial advantage of accepting the new order            $ 360,000

Therefore, the company should accept the new order.