Cane Company manufactures two products called Alpha and Beta that sell for $215

Question

Cane Company manufactures two products called Alpha and Beta that sell for $215 and $160, respectively Each product uses only one type of raw material that costs $7 per pound. The company has the capacity to annually produce 125,000 units of each product. Its unit costs for each product at this level of activity are given below Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Alpha $ 42 35 23 Beta $ 21 28 21 34 24 26 28 31 Total cost per unit $190 $154 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 111,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 26,000 additional Alphas for a price of $144 per unit. If Cane accepts the customer's offer, it will decrease Alpha sales to regular customers by 12,000 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) by $

Explanation / Answer

CM per unit of Alpha: Selling price 215 Less: Variable cost 128 (42+35+23+28) Contribution margin per unit 87 Incremental analysis: Incremental revenue (26000*144) 3744000 Less: Incremental cost Material (26000*42) 1092000 Labour (26000*35) 910000 Mfg Oh (26000*23) 598000 Selling expense (26000*28) 728000 Loss of contribution of 12000 units frm regular customer 1044000 Net decrease in income -628000 Net operating income decrease by ($628000)

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