Cane Company manufactures two products called Alpha and Beta that sell for $145

Question

Cane Company manufactures two products called Alpha and Beta that sell for $145 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 unit costs for each product at this level of activity are given below: Alpha $ 25 Beta $ 10 21 22 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses 17 18 20 14 10 12 17 Total cost per unit $113 $ 80 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 97,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 12,000 additional Alphas for a price of $88 per unit. If Cane accepts the customer's offer, it will decrease Alpha sales to regular customers by 7,000 units. What is the amount of incremental net operating income if the order is accepted? (Input the amount as positive value.) Net operating income by $ ? (Click to select) Decreases Increases

Explanation / Answer

Net operating income decreases by $349000.

The traceable fixed expenses and common fixed expenses are irrelevant as they will not change whether the Alphas are sold to existing customers or new customer.

Existing customers-decrease Alphas (7000 units) New customer-
Alphas
(12000 units) Differential: Increase
(Decrease) in net operating income Per unit $ Total $ Per unit $ Total $ Selling price 145 -1015000 88 1056000 41000 Less: Variable costs Direct materials 25 175000 25 300000 -125000 Direct labor 22 154000 22 264000 -110000 Manufacturing overhead 17 119000 17 204000 -85000 Selling expenses 14 98000 14 168000 -70000 Total variable costs 78 546000 78 936000 -390000 Incremental net operating income 67 -469000 10 120000 -349000

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