Cane Company manufactures two products called Alpha and Beta that sell for $150 and $105, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 107,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha Beta Direct materials $ 30 $ 10 Direct labor 25 20 Variable manufacturing overhead 12 10 Traceable fixed manufacturing overhead 21 23 Variable selling expenses 17 13 Common fixed expenses 20 15 Total cost per unit $ 125 $ 91 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. 1.Assume that Cane expects to produce and sell 100,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 15,000 additional Alphas for a price of $100 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 8,000 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? 2. Assume that Cane normally produces and sells 95,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?
Cane Company manufactures two products called Alpha and Beta that sell for $150 and $105, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 107,000 units of each product. Its average cost per unit for each product at this level of activity are given below:
| Alpha | Beta | |
|---|---|---|
| Direct materials | $ 30 | $ 10 |
| Direct labor | 25 | 20 |
| Variable manufacturing overhead | 12 | 10 |
| Traceable fixed manufacturing overhead | 21 | 23 |
| Variable selling expenses | 17 | 13 |
| Common fixed expenses | 20 | 15 |
| Total cost per unit | $ 125 | $ 91 |
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.
1.Assume that Cane expects to produce and sell 100,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 15,000 additional Alphas for a price of $100 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 8,000 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?
2. Assume that Cane normally produces and sells 95,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?
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