Required information [The following information applies to the questions display

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Required information [The following information applies to the questions displayed below.) Cane Company manufactures two products called Alpha and Beta that sell for $130 and $90, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 102,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha Beta $10 21 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses $ 25 17 18 14 17 $113 20 10 12 $80 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 97,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 12,000 additional Alphas for a price of $88 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? inancial (disadvantage)

Explanation / Answer

5 a.Alpha variable cost excluding common fixed expenses is 25 + 22 + 17 + 18 + 14 = $96

Fixed cost for alpha is 17 * 102000 = $1734000

Profit after selling 97000 units @$130 will be

= 97000 * ( 130 - 96) - 1734000 = 97000 * 34 - 1734000 = 3298000 - 1734000 = $1,534,000

Now if we expect new customers order then the sales will be as follows

90000 units @ 130 + 12000 units @ 88 less variable cost of 102000 units @ 96 less fixed cost of $1734000

= 11,700,000 + 1,056,000 - 9,792,000 - 1,734,000 = $ 1,230,000 new profit

We see that new profit is less then the old profit by $304,000 (1534000 - 1230000), hence company is at a financial disadvantage.

5 b. The company should reject the new offer due to lesser profit.

Contribution margin is the difference between sales and variable cost

For Alpha it is 130 - 25 - 22 - 17 - 18 - 14 = 130 - 96 = $34

For Beta it is 90 - 10 -21 -7 - 20 - 10 = 90 - 68 = $22

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