Question

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 Direct materials $ 25 $ 10 Direct labor 22 21 Variable manufacturing overhead 17 7 Traceable fixed manufacturing overhead 18 20 Variable selling expenses 14 10 Common fixed expenses 17 12 Total cost per unit $ 113 $ 80 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.

2. What is the company’s total amount of common fixed expenses?

3. Assume that Cane expects to produce and sell 82,000 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. What is the financial advantage (disadvantage) of accepting the new customer's order?

4. Assume that Cane expects to produce and sell 92,000 Betas during the current year. One of Cane’s sales representatives has found a new customer who is willing to buy 2,000 additional Betas for a price of $41 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

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?

Answer 1

Solution 2:

Total amount of common fixed expenses = ($17 + $12) * 102000 = $2,958,000

Solution 3:

Contribution margin per unit on special order of alpha= Selling price - Variable cost per unit

= $88 - ($25 + $22 + $17 + $14) = $10 per unit

If Cane accepts the customer’s offer for 12000 alpha, then increase in operating income = 12000*$10 = $120,000

Solution 4:

Contribution margin per unit on special order of Beta= Selling price - Variable cost per unit

= $41 - ($10 + $21 + $7 + $10) = -$7

If Cane accepts the customer’s offer for 2000 Beta, then increase (decrease) in operating income = 2000*(-$7) = -$14,000

Solution 5:

Regular contribution margin per unit for Alpha = $130 - ($25 + $22 + $17 + $14) = $52 per unit

Contribution margin per unit on special order of alpha= Selling price - Variable cost per unit

= $88 - ($25 + $22 + $17 + $14) = $10 per unit

If Cane accepts the customer’s offer for 12000 alpha, additional contribution margin from special order = 12000*$10 = $120,000

If Cane accept special order then loss of contribution margin on regular order = 7000*$52 = $364,000

Incremental net operating income if the order is accepted = $120,000 - $364,000 = ($244,000)