Part 5 of Required information The Foundational 15 [LO12-2, LO12-3, LO 12-4, LO
ID: 2524415 • Letter: P
Question
Part 5 of Required information The Foundational 15 [LO12-2, LO12-3, LO 12-4, LO 12-5, LO 12-6) [The following information applies to the questions displayed below.) points Cane Company manufactures two products called Alpha and Beta that sell for $140 and $100, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 106,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Skipped Alpha Beta $ 32 $16 24 109 10 19 Print Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit Reference 899 HN $121 $92 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. Foundational 12-5 5. Assume that Cane expects to produce and sell 99,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 14,000 additional Alphas for a price of $96 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 7,000 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? Complete this question by entering your answers in the tabs below. Req 5A Req 5B What is the financial advantage (disadvantage) of accepting the new customer's order? Req 5A Req 5B >Explanation / Answer
Remeber one thing fixed expenses are never relevant while taking financial decision as they will anyways be incurred.
Variable costs of producing
Alpha = total cost - common fixed expense = $121 - $19 = $102
Sale price - variable cost = $140 - $102 = $38 = contribution
Now the company can produce 106,000 units every year capacity
This year it is planning to produce 99,000 units there is idle capacity of 7,000 units
Offer is of 14,000 units to new buyer
Now the contribution will be different for that sales as there will not be any variable selling expenses
therefore the variable cost will be = $121 - $19 - $16 = $86
Sale price = $96
Contribution = $96 - $ 86 = $10
Total contribution = 14,000 x 10 - opportunity cost contribution might have earned - what it will earn
140,000 - [7000 x (38 - 10) ] = 140,000 - 1,96,000 = 56,000
a. there will be financial disadvantage of $56,000
and therefore we should not accept the new buyers offer