Cane Company manufactures two products called Alpha and Beta that sell for $125
ID: 2453947 • Letter: C
Question
Cane Company manufactures two products called Alpha and Beta that sell for $125 and $85, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 101,000 units of each product. Its unit costs for each product at this level of activity are given below:
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.
Assume that Cane expects to produce and sell 96,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 11,000 additional Alphas for a price of $84 per unit. If Cane accepts the customer’s offer, it will decrease Alpha sales to regular customers by 6,000 units.
Calculate the incremental net operating income if the order is accepted?
i keep getting - 186,000 but its marking wrong
Cane Company manufactures two products called Alpha and Beta that sell for $125 and $85, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 101,000 units of each product. Its unit costs for each product at this level of activity are given below:
Explanation / Answer
a. for incremental analysis, we will ignore all fixed costs. Incremental analysis will analyse only those revenues and costs that will change if the order for 11,000 additional alphas are accepted.
Net operating income from 11,000 alphas:
The sales of regular customers will see a decrease of 6,000 units. Now there will be an opportunity cost for the contribution margin of the lost sales of 6,000 units.
contribution margin from the 6,000 units:
net operating income from the order of 11,000 additional alphas = $132,000
Opporunity cost of lost contribution margin of 6,000 units of alphas = $318,000
Incremental net operating income = net income from 11,000 units - opportunity cost
= 132,000 - 318,000 = - $186,000
Number of units Price/cost per unit Total $ Sales 11,000 84 924,000 less: direct labor 21 231,000 direct materials 30 330,000 variable manufacturing overhead 8 88,000 variable selling expenses 13 143,000 Total expenses 792,000 Operating income 132,000Related Questions
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