Question
Cane Company manufactures two products called Alpha and Beta that sell for $185 and $150, respectively. Each product uses only one type of raw material
Cane Company manufactures two products called Alpha and Beta that sell for $185 and $150, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 119,000 units of each product. Its average cost per unit for each product at this level of activity are given below:
Alpha Beta
Direct materials $40 $24
Direct labor 33 28
Variable manufacturing overhead 20 18
Traceable fixed manufacturing overhead 28 31
Variable selling expenses 25 21
Common fixed expenses 28 23
Total cost per unit $174 $145
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 93,000 Alphas during the current year. A supplier has offered to manufacture and deliver 93,000 Alphas to Cane for a price of $132 per unit. What is the financial advantage (disadvantage) of buying 93,000 units from the supplier instead of making those units?
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