Assume that Cane expects to produce and sell 111,000 Alphas during the current y

Question

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.

Calculate the incremental net operating income if the order is accepted? (Loss amount should be indicated with a minus sign.)

           

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:

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 26,000 additional Alphas for a price of $144 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease?

Assume that Cane expects to produce and sell 106,000 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 $74 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease?

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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.

a.

Calculate the incremental net operating income if the order is accepted? (Loss amount should be indicated with a minus sign.)

           

b. Based on your calculations above should the special order be accepted? Yes No

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:

Alpha Beta   Direct materials $ 42 $ 21   Direct labor 35 28   Variable manufacturing overhead 23 21   Traceable fixed manufacturing overhead 31 34   Variable selling expenses 28 24   Common fixed expenses 31 26   Total cost per unit $ 190 $ 154

Explanation / Answer

Note: It is assumed that Variable selling expenses is not required for sales to new customer.

Answer:

a. The incremental net operating income if the order of Alpha is accepted = $100,000

b. Based on my calculations above, the special order of Alha should be accepted

For Beta:

If Cane accepts the new customer’s offer for 4000 additional Beta , Profit will increase by $16,000

Statement of contribution Sl no Operation Alpha Beta i Direct Material 42 21 ii Direct Labour 35 28 iii Variable Manufacturing Overhead 23 21 iv Variable Selling Expenses 28 24 v Total Variable cost of sales per unit i+ii+iii+iv 128 94 vi Selling Price 215 160 vii Contribution per unit for regular sales vi-v 87 66 viii Selling Price for new order 144 74 ix Total Variable cost of sales per unit except variable selling exp i+ii+iii 100 70 x Contribution per unit for new order viii-ix 44 4

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