Cane Company manufactures two products called Alpha and Beta that sell for $165
ID: 2590248 • Letter: C
Question
Cane Company manufactures two products called Alpha and Beta that sell for $165 and $130, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 113,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overheacd Variable selling expenses Common fixed expenses $ 40 29 15 25 21 24 $154 $ 24 25 14 27 17 19 $126 Total cost per unit 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. 5. Assume that Cane expects to produce and sell 104,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 19,000 additional Alphas for a price of $116 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 10,000 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 SA Req 5B What is the financial advantage (disadvantage) of accepting the new customer's order?Explanation / Answer
a)
Current Sale
Sale after new offer
Annual sales in units
17160000
(104000*165)
94000*165 = 15510000
Annual sales in new offer
0
19000*116 = 2204000
Total annual sales (A)
17160000
17714000
Total Cost excluding common fixed expenses (B)
13520000
[104000*(154-24)]
14690000
[113000*(154-24)]
Common fixed expenses (C)
2712000
(24*113000)
2712000
(24*113000)
Total Cost (B+C) = D
16232000
17402000
Gross Profit (A – D)
928000
312000
Financial Disadvantage
928000-312000 = 616000
There is financial disadvantage of 616000.
b)
Special order should not be accepted on the basis of above calculation.
Current Sale
Sale after new offer
Annual sales in units
17160000
(104000*165)
94000*165 = 15510000
Annual sales in new offer
0
19000*116 = 2204000
Total annual sales (A)
17160000
17714000
Total Cost excluding common fixed expenses (B)
13520000
[104000*(154-24)]
14690000
[113000*(154-24)]
Common fixed expenses (C)
2712000
(24*113000)
2712000
(24*113000)
Total Cost (B+C) = D
16232000
17402000
Gross Profit (A – D)
928000
312000
Financial Disadvantage
928000-312000 = 616000