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 average cost per unit for each product at this level of activity are given below: Alpha Beta Direct materials $ 40 $ 24 Direct labor 34 28 Variable manufacturing overhead 21 19 Traceable fixed manufacturing overhead 29 32 Variable selling expenses 26 22 Common fixed expenses 29 24 Total cost per unit $ 179 $ 149 The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are unavoidable and have been allocated to products based on sales dollars. 5. Assume that Cane expects to produce and sell 109,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 24,000 additional Alphas for a price of $136 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 11,000 units. What is the financial advantage (disadvantage) of accepting the new customer’s order? Based on your calculations above should the special order be accepted?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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 average cost per unit for each product at this level of activity are given below:

	Alpha	Beta
Direct materials	$ 40	$ 24
Direct labor	34	28
Variable manufacturing overhead	21	19
Traceable fixed manufacturing overhead	29	32
Variable selling expenses	26	22
Common fixed expenses	29	24
Total cost per unit	$ 179	$ 149

The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are unavoidable and have been allocated to products based on sales dollars.

5. Assume that Cane expects to produce and sell 109,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 24,000 additional Alphas for a price of $136 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 11,000 units.

What is the financial advantage (disadvantage) of accepting the new customer’s order?
Based on your calculations above should the special order be accepted?

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