Question

Cane Company manufactures two products called Alpha and Beta that sell for $185 and $120, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 112,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha Beta Direct materials $ 30 $ 10 Direct labor 22 29 Variable manufacturing overhead 20 13 Traceable fixed manufacturing overhead 24 26 Variable selling expenses 20 16 Common fixed expenses 23 18 Total cost per unit $ 139 $ 112 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. 3. Assume that Cane expects to produce and sell 88,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 18,000 additional Alphas for a price of $112 per unit. What is the financial advantage (disadvantage) of accepting the new customer's order?

Answer 1

Answer with working is given below

Incremental Sales 18,000 units x $112 per unit $2,016,000 Less: Incremental Variable cost Direct material Direct Labor Variable Overhead Variable selling expense Total Variable Cost $540,000 $396,000 $360,000 $360,000 $1,656,000 Incremental Contribution $360,000 Financial Advantage of accepting the new customer order is $360,000 Variable cost per unit for Alpha Direct material Direct Labor Variable Overhead Variable selling expense Total Variable cost per unit $92 Only variable cost is relevant in evaluation of new customer order