Foundational [LO12-2, LO12-3, LO12-4, LO12-5, LO12-6] [The following information

Question

Foundational [LO12-2, LO12-3, LO12-4, LO12-5, LO12-6] [The following information applies to the questions displayed below.] 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 unit costs for each product at this level of activity are given below: Alpha Beta Direct materials $ 40 $ 24 Direct labor 29 25 Variable manufacturing overhead 15 14 Traceable fixed manufacturing overhead 25 27 Variable selling expenses 21 17 Common fixed expenses 24 19 Total cost per unit $ 154 $ 126 The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are deemed unavoidable and have been allocated to products based on sales dollars.

Assume that Cane expects to produce and sell 89,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 19,000 additional Alphas for a price of $116 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease?

Explanation / Answer

Note: While considering the additional order only variable cost is considered since the fixed is irrelevant for the decision making.

Amounts in $ Alpha Beta Selling Price p.u 165 130 Cost p.u Direct material 40 24 Direct labor 29 25 Variable manufacturing overhead 15 14 Fixed manufacturing Overhead 25 27 Variable selling expenses 21 17 Common fixed expense 24 19 Total cost per unit 154 126 Profit Per unit 11 4 Quantity sold 89000 - Profit 979000 If fixed manufacturing overheads are avoided Total cost per unit 129 Profit 2225000 If the company accepts the order for additional units: In this case only variable cost is considered for decision making. Direct material 40 Direct labor 29 Variable manufacturing overhead 15 Variable selling expenses 21 Total variable cost per unit 105 Selling price per unit 116 Profit per unit 11 Quantity sold 19000 Profit is increased by 209000

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