Question
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
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 unit costs 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 deemed unavoidable and have been allocated to products based on sales dollars.
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Assume that Cane expects to produce and sell 96,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 26,000 additional Alphas for a price of $144 per unit. If Cane accepts the customers offer, how much will its profits increase or decrease?
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