Cane Company manufactures two products called Alpha and Beta that sell for $190

Question

Cane Company manufactures two products called Alpha and Beta that sell for $190 and $155, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 122,000 units of each product. Its unit costs for each product at this level of activity are given below: Beta $40 $ 24 28 19 32 Alpha Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses 34 21 29 26 29 24 $179 $149 Total cost per unit 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

Explanation / Answer

Net Operating income decreases by $336000

Incremental Net Operating Income = -$659000

Requirement 5b:

Since incremental net operating income is negative, the special order should not be accepted.

Profit decreases by $408000

Profit will increase by $2100000 (4320000-2220000)

Requirement 3: Calculation of Increase or decrease in profit: Particulars Amout ($) Increase in sales 24000*136 3264000 Less: Increase in expenses Direct Materials 24000*40 960000 Direct Labor 24000*34 816000 Variable Manufacturing Overhead 24000*21 504000 Variable Selling Expenses 24000*26 624000 Traceable Fixed Costs 24000*29 696000 Increase in net operating income -336000

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