Question
Cane Company manufactures two products called Alpha and Beta that sell for $150 and $110, respectively. Each product uses only one type of raw material
Cane Company manufactures two products called Alpha and Beta that sell for $150 and $110, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 108,000 units of each product. Its unit costs for each product at this level of activity are given below:
Alpha Beta
Direct materials $ 30 $ 15
Direct labor 26 22
Variable manufacturing overhead 13 11
Traceable fixed manufacturing overhead 22 24
Variable selling expenses 18 14
Common fixed expenses 21 16
Total cost per unit $ 130 $ 102
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 101,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 16,000 additional Alphas for a price of $104 per unit. If Cane accepts the customers offer, it will decrease Alpha sales to regular customers by 9,000 units.
Calculate the incremental net operating income if the order is accepted?
Please post a full solution.
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