Introduction To Managerial Accounting
Introduction To Managerial Accounting
8th Edition
ISBN: 9781259917066
Author: BREWER, Peter C., Garrison, Ray H., Noreen, Eric W.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 11, Problem 5F15

Cane Company manufactures two products called A1pia d Beta that sell for $120 and $80, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity produce 100,000 units of each product. Its average cost per unit for each product at this level of activity are given below:
Chapter 11, Problem 5F15, Cane Company manufactures two products called A1pia d Beta that sell for $120 and $80, respectively.
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.
Required:
(Answer each question independently unless instructed otherwise.)
Assume that Cane expects to produce and sell 95,000 Alphas dining the current vex. One of Cane’s sales representatives has found a new customer who is willing to buy 10,000 additional Alphas for a price of $80 per emit; however pursuing this opportunity will decrease Alpha sales to regular customers by 5,000 units. What is the financial advantage (disadvantage) of accepting the new customer’s order?

Expert Solution & Answer
Check Mark
To determine

Concept Introduction:

Financial advantage (disadvantage): Financial advantage (disadvantage) refers to the incremental profit or loss, a company will earn in situations like acceptance of a special order, dropping of a business line, etc.

It is calculated by only considering the relevant costs. The incremental revenues and incremental costs are taken together to calculate financial advantage or disadvantage. Financial advantage refers to incremental net operating income and financial disadvantage refers to incremental net operating loss.

To calculate:

Financial advantage (disadvantage) of accepting the new customer’s order for Alpha

Answer to Problem 5F15

Solution:

The financial disadvantage of accepting the new customer’s order for Alpha is $ 145,000.

Explanation of Solution

The incremental net operating profit (loss) is the difference between incremental revenues and costs.

    Alpha - Incremental Net operating profit (Loss) (in $)
    Incremental Revenue ( $ 80/ unit X 10,000 additional units)800,000
    Less:
    Incremental costs -
    Direct material ( $ 30/ units X 10,000 additional units)300,000
    Direct labor ( $ 20/ unit X 10,000 additional units)200,000
    Variable manufacturing overhead ( $ 7/ unit X 10,000 additional units)70,000
    Variable selling expenses ( $ 12/ unit X 10,000 additional units)120,000
    Total incremental costs(690,000)
    Less: Foregone Sales revenue due to acceptance of order ( $ 120 per unit X 5,000 units )(600,000)
    Add: Decrease in costs related to the sales forgone345,000
    Alpha - Incremental net operating income (Loss)(145,000)

Given, the information for the product Alpha −

  • Additional sales units = 10,000 units
  • Selling price per unit = $ 80 per unit
  • Direct Material per unit = $ 30 per unit
  • Direct Labor per unit = $ 20 per unit
  • Variable manufacturing overhead per unit = $ 7 per unit
  • Variable selling expenses per unit = $ 12 per unit
  • Foregone number of units due to acceptance of offer = 5,000 units
  • Sales price per unit for regular sales = $ 120 per unit

Calculations:

  1. Incremental revenue

  2.   Incremental revenue = $ 80 per unit X 10,000 unitsIncremental revenue = $ 800,000

  3. Incremental costs

  4.   Direct material = $ 30 per unit X 10,000 unitsDirect material = $ 300,000

      Direct labor = $ 20 per unit X 10,000 unitsDirect labor = $ 200,000

      Variable manufacturing overhead per unit = $ 7 per unit X 10,000 unitsVariable manufacturing overhead per unit = $ 70,000

      Variable selling expenses per unit = $ 12 per unit X 10,000 unitsVariable selling expenses per unit = $ 120,000

      Total incremental costs = Direct material + Direct labor + Variable manufacturing overhead                                           + Variable selling expenses

      Total incremental costs = $ 300,000 +$ 200,000 + $ 70,000 + $ 120,000Total incremental costs = $ 690,000

  5. Foregone Sales revenue due to acceptance of offer

  6.   Foregone Sales revenue due to acceptance of offer = $ 120 per unit X 5,000 unitsForegone Sales revenue due to acceptance of offer = $ 600,000

  7. Decrease in cost due to sales forgone −

  8.    Decrease in cost due to sales forgone = ( Direct material per unit + Direct Labor per unit  + Variable manufacturing+ Variable selling expenses )                                                                       X Sales forgone UnitsDecrease in cost due to sales forgone = ( $ 30 + $ 20 + $ 7 + $ 12) X 5,000 unitsDecrease in cost due to sales forgone = $ 345,0000

  9. Incremental Net operating income (Loss)

  10.    Incremental Net operating income (Loss) = Incremental revenue  Incremental costs                                                                       Foregone Sales revenue due to acceptance of offer                          +Decrease in cost due to sales forgoneIncremental Net operating income (Loss) = $ 800,000  $ 690,000 $ 600,000+ $ 345,000Incremental Net operating income (Loss) = ($ 145,000)

Conclusion

Thus, the financial disadvantage of accepting the new customer’s order for Alpha = $ 145,000.

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Chapter 11 Solutions

Introduction To Managerial Accounting

Ch. 11 - Give at least four examples of possible...Ch. 11 - Prob. 12QCh. 11 - Define the following terms: joint products, joint...Ch. 11 - Prob. 14QCh. 11 - Prob. 15QCh. 11 - Prob. 16QCh. 11 - The Excel worksheet form that appears below is to...Ch. 11 - The Excel worksheet form that appears below is to...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Prob. 9F15Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Prob. 13F15Ch. 11 - Prob. 14F15Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Identifying Relevant Costs Syahn, AB, is a Swedish...Ch. 11 - Prob. 2ECh. 11 - Make or Buy Decision Troy Engines, Ltd,...Ch. 11 - Special Order Decision Imperial Jewelers...Ch. 11 - Volume Trade-off Decisions Outdoor Luggage, Inc.,...Ch. 11 - Prob. 6ECh. 11 - Sell or Process Further Decisions Dorsey Company...Ch. 11 - Volume Trade-Off Decisions Barlow Company...Ch. 11 - Special Order Decision Delta Company produces a...Ch. 11 - Make or Buy Decision Futura Company purchases the...Ch. 11 - Make or Buy Decision Han Products manufactures...Ch. 11 - Volume Trade-Off Decisions Benoit Company produces...Ch. 11 - Prob. 13ECh. 11 - Identification of Relevant Costs Kristen Lu...Ch. 11 - Prob. 15ECh. 11 - Identification of Relevant Costs Bill has just...Ch. 11 - Prob. 17ECh. 11 - Prob. 18PCh. 11 - Dropping or Retaining a Segment Jackson Count...Ch. 11 - Sell or Process Further Decision (Prepared from a...Ch. 11 - Prob. 21PCh. 11 - Prob. 22PCh. 11 - Make or Buy Decision Silven Industries, which...Ch. 11 - Prob. 24PCh. 11 - Prob. 25PCh. 11 - Close or Retain a Store Superior Markets. Inc.,...Ch. 11 - Sell or Process Further Decisions Come-Clean...Ch. 11 - Make or Buy Decisions “In my opinion, we ought to...
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