Question

Cane Company manufactures two products called Alpha and Beta that sell for $205 and $164, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 127,000 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			37				30
Variable manufacturing overhead			24				22
Traceable fixed manufacturing overhead			32				35
Variable selling expenses			29				25
Common fixed expenses			32				27
Total cost per unit		$	194			$	163

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.

3. 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 that is willing to buy 27,000 additional Alphas for a price of $148 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease? 4. Assume that Cane expects to produce and sell 107,000 Betas during the current year. One of Cane’s sales representatives has found a new customer that is willing to buy 4,000 additional Betas for a price of $80 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease? 5. Assume that Cane expects to produce and sell 112,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 27,000 additional Alphas for a price of $148 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 12,000 units. a. Calculate the incremental net operating income if the order is accepted? (Loss amount should be indicated with a minus sign.)

Answer 1

Part 3)

The increase/decrease in profit is calculated with the use of following table:

Incremental Sales (27,000*148)		3,996,000
Less Variable Costs
Direct Material (27,000*40)	1,080,000
Direct Labor (27,000*37)	999,000
Variable Manufacturing Overhead (27,000*24)	648,000
Variable Selling Expenses (27,000*29)	783,000
Incremental Total Variable Cost		3,510,000
Incremental Profits		$486,000

The profits will increase by $486,000 if the offer is accepted.

___________

Part 4)

The increase/decrease in profit is calculated with the use of following table:

Incremental Sales (4,000*80)		320,000
Less Variable Costs
Direct Material (4,000*24)	96,000
Direct Labor (4,000*30)	120,000
Variable Manufacturing Overhead (4,000*22)	88,000
Variable Selling Expenses (4,000*25)	100,000
Incremental Total Variable Cost		404,000
Incremental Loss		-$84,000

The profits will decrease by $84,000 if the offer is accepted.

___________

Part 5)

The incremental net operating income is calculated as follows:

Incremental Sales (27,000*148)		3,996,000
Less Variable Costs
Direct Material (27,000*40)	1,080,000
Direct Labor (27,000*37)	999,000
Variable Manufacturing Overhead (27,000*24)	648,000
Variable Selling Expenses (27,000*29)	783,000
Incremental Total Variable Cost		3,510,000
Loss of Contribution Margin from Regular Customers [12,000*(205 – 40 – 37 – 24 – 29)]		900,000
Incremental Net Operating Income		-$414,000

The net operating income would decrease by $414,000 if the offer is accepted.