Question
Cane Company manufactures two products called Alpha and Beta that sell for $210 and $172, respectively. Each product uses only one type of raw material
Cane Company manufactures two products called Alpha and Beta that sell for $210 and $172, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 128,000 units of each product. Its unit costs for each product at this level of activity are given below:
Alpha | Beta | |||||||
Direct materials | $ | 40 | $ | 24 | ||||
Direct labor | 38 | 34 | ||||||
Variable manufacturing overhead | 25 | 23 | ||||||
Traceable fixed manufacturing overhead | 33 | 36 | ||||||
Variable selling expenses | 30 | 26 | ||||||
Common fixed expenses | 33 | 28 | ||||||
Total cost per unit | $ | 199 | $ | 171 | ||||
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 98,000 Alphas during the current year. A supplier has offered to manufacture and deliver 98,000 Alphas to Cane for a price of $152 per unit. If Cane buys 98,000 units from the supplier instead of making those units, how much will profits increase or decrease? (Input the amount as positive value.) |
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