Answer :
To analyze the financial implications of accepting the new customer's order, we need to determine the additional revenue generated, the additional costs incurred, and any losses due to decreased sales to regular customers.
Step-by-Step Calculation:
### Given Data
1. Sale Price and Expected Sales:
- Regular price of Alpha: \[tex]$125 per unit - Special price offered: \$[/tex]84 per unit
- Expected regular sales of Alpha: 96,000 units
- Additional units requested by new customer: 11,000 units
- Decrease in regular sales due to special order: 6,000 units
2. Cost Data per Unit of Alpha:
- Direct materials: \[tex]$30 - Direct labor: \$[/tex]21
- Variable manufacturing overhead: \[tex]$8 - Traceable fixed manufacturing overhead: \$[/tex]17
- Variable selling expenses: \[tex]$13 - Total variable and traceable costs: \$[/tex]30 + \[tex]$21 + \$[/tex]8 + \[tex]$17 + \$[/tex]13 = \[tex]$89 ### Calculations #### Additional Revenue and Cost for Special Order 1. Additional Revenue from Special Order: \[ \text{Additional units sold} \times \text{Special price} = 11,000 \times 84 = 924,000 \] 2. Additional Cost for Special Order: \[ \text{Additional units sold} \times \text{Variable and traceable costs per unit} = 11,000 \times 89 = 979,000 \] #### Loss in Revenue and Cost due to Decreased Regular Sales 1. Loss in Revenue: \[ \text{Decrease in regular sales} \times \text{Regular price} = 6,000 \times 125 = 750,000 \] 2. Cost Savings due to Decreased Regular Sales: \[ \text{Decrease in regular sales} \times \text{Variable and traceable costs per unit} = 6,000 \times 89 = 534,000 \] #### Financial Advantage/Disadvantage Calculation 1. Net Effect of Additional Sales: \[ \text{Additional revenue} - \text{Additional cost} = 924,000 - 979,000 = -55,000 \] 2. Net Effect of Lost Regular Sales: \[ \text{Loss in revenue} - \text{Cost savings} = 750,000 - 534,000 = 216,000 \] 3. Total Financial Advantage/Disadvantage: \[ \text{Net effect of additional sales} - \text{Net effect of lost regular sales} = -55,000 - 216,000 = -271,000 \] ### Conclusion a. The financial disadvantage of accepting the new customer's order is \(\$[/tex]271,000.\)
b. Based on these calculations, the special order should _not_ be accepted due to the financial disadvantage of [tex]\(\$271,000\)[/tex].
By breaking down the problem into the additional revenue, costs, and effects of decreased sales, we can see that the net effect is a significant financial loss, meaning that accepting the special order is not financially beneficial for Cane Company.
Step-by-Step Calculation:
### Given Data
1. Sale Price and Expected Sales:
- Regular price of Alpha: \[tex]$125 per unit - Special price offered: \$[/tex]84 per unit
- Expected regular sales of Alpha: 96,000 units
- Additional units requested by new customer: 11,000 units
- Decrease in regular sales due to special order: 6,000 units
2. Cost Data per Unit of Alpha:
- Direct materials: \[tex]$30 - Direct labor: \$[/tex]21
- Variable manufacturing overhead: \[tex]$8 - Traceable fixed manufacturing overhead: \$[/tex]17
- Variable selling expenses: \[tex]$13 - Total variable and traceable costs: \$[/tex]30 + \[tex]$21 + \$[/tex]8 + \[tex]$17 + \$[/tex]13 = \[tex]$89 ### Calculations #### Additional Revenue and Cost for Special Order 1. Additional Revenue from Special Order: \[ \text{Additional units sold} \times \text{Special price} = 11,000 \times 84 = 924,000 \] 2. Additional Cost for Special Order: \[ \text{Additional units sold} \times \text{Variable and traceable costs per unit} = 11,000 \times 89 = 979,000 \] #### Loss in Revenue and Cost due to Decreased Regular Sales 1. Loss in Revenue: \[ \text{Decrease in regular sales} \times \text{Regular price} = 6,000 \times 125 = 750,000 \] 2. Cost Savings due to Decreased Regular Sales: \[ \text{Decrease in regular sales} \times \text{Variable and traceable costs per unit} = 6,000 \times 89 = 534,000 \] #### Financial Advantage/Disadvantage Calculation 1. Net Effect of Additional Sales: \[ \text{Additional revenue} - \text{Additional cost} = 924,000 - 979,000 = -55,000 \] 2. Net Effect of Lost Regular Sales: \[ \text{Loss in revenue} - \text{Cost savings} = 750,000 - 534,000 = 216,000 \] 3. Total Financial Advantage/Disadvantage: \[ \text{Net effect of additional sales} - \text{Net effect of lost regular sales} = -55,000 - 216,000 = -271,000 \] ### Conclusion a. The financial disadvantage of accepting the new customer's order is \(\$[/tex]271,000.\)
b. Based on these calculations, the special order should _not_ be accepted due to the financial disadvantage of [tex]\(\$271,000\)[/tex].
By breaking down the problem into the additional revenue, costs, and effects of decreased sales, we can see that the net effect is a significant financial loss, meaning that accepting the special order is not financially beneficial for Cane Company.
