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 unit costs for each product at this level of activity are given below: Alpha S 30 22 Beta S 10 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses 24 20 Total cost per unit $ 139 S 112 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. Required: Assume that Cane expects to produce and sell 103.000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 18,000 additional Alphas for a price of $112 per unit. If Cane accepts the customer's offer, it will decrease Alpha sales to regular customers by 9,000 units. What is the amount of incremental net operating income if the order is accepted? (Input the amount as positive value.) Net operating income Click to select) 7 by S

Answer 1

Incremental net operating income = Contribution Margin from Additional sales – contribution margin lost on lost regular sales since fixed costs will remain the same

= (112-30-22-20-20)*18000 – (185-30-22-20-20)*9000

= -$477000

i.e. Net operating income will decrease by $477,000