Question
Cane Company manufactures two products called Alpha and Beta that sell for $135 and $95, respectively. Each product uses only one type of raw material
Cane Company manufactures two products called Alpha and Beta that sell for $135 and $95, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 105,000 units of each product. Its unit costs for each product at this level of activity are given below: |
Alpha | Beta | |||||||
Direct materials | $ | 30 | $ | 18 | ||||
Direct labor | 23 | 16 | ||||||
Variable manufacturing overhead | 10 | 8 | ||||||
Traceable fixed manufacturing overhead | 19 | 21 | ||||||
Variable selling expenses | 15 | 11 | ||||||
Common fixed expenses | 18 | 13 | ||||||
Total cost per unit | $ | 115 | $ | 87 | ||||
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. |
Required: |
Assume that Cane expects to produce and sell 83,000 Alphas during the current year. A supplier has offered to manufacture and deliver 83,000 Alphas to Cane for a price of $92 per unit. If Cane buys 83,000 units from the supplier instead of making those units, how much will profits increase or decrease? |
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