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 average cost per unit 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 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 111,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 26,000 additional Alphas for a price of $144 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 12,000 units. a. What is the financial advantage (disadvantage) of accepting the new customer’s order? b. Based on your calculations above should the special order be accepted?
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 average cost per unit for each product at this level of activity are given below:
| Alpha | Beta | |
|---|---|---|
| Direct materials | $ 42 | $ 21 |
| Direct labor | 35 | 28 |
| Variable manufacturing |
23 | 21 |
| Traceable fixed manufacturing overhead | 31 | 34 |
| Variable selling expenses | 28 | 24 |
| Common fixed expenses | 31 | 26 |
| Total cost per unit | $ 190 | $ 154 |
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 111,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 26,000 additional Alphas for a price of $144 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 12,000 units.
a. What is the financial advantage (disadvantage) of accepting the new customer’s order?
b. Based on your calculations above should the special order be accepted?
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