Question

Required information The following information applies to the questions displayed below. Cane Company manufactures two products called Alpha and Beta that sell for $130 and $90, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 102,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha Beta $10 21 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit s 25 17 18 14 17 $113 20 10 12 $80 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. 9. Assume that Cane expects to produce and sell 82,000 Alphas during the current year. A supplier has offered to manufacture and deliver 82,000 Alphas to Cane for a price of $88 per unit. What is the financial advantage (disadvantage) of buying 82,000 units from the supplier instead of making those units?

Answer 1

Produce
Units		82,000
Variable expenses:
Direct material	$           25	$       20,50,000
Direct labor	$           22	$       18,04,000
Variable manufacturing overhead	$           17	$       13,94,000
Traceable fixed manufacturing overhead	$           18	$       14,76,000
Variable selling expenses	$           14	$       11,48,000
Common fixed expenses ($17 X 102000)	$           17	$       17,34,000
Total cost		$       96,06,000
Buy
Units		82,000
Cost of Purchase	$           88	$       72,16,000
Common fixed expenses ($17 X 102000)		$       17,34,000
Total cost		$       89,50,000
Difference	=	$9606000 - $8950000
	=	$          6,56,000
9.
If the supplier buys 82000 units instead of making:
Increase in profit by $656000