Question
Cane Company manufactures two products called Alpha and Beta that sell for $140 and $100, respectively. Each product uses only one type of raw material
Cane Company manufactures two products called Alpha and Beta that sell for $140 and $100, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 106,000 units of each product. Its average cost per unit for each product at this level of activity are given below:
Alpha | Beta | |||||||
Direct materials | $ | 32 | $ | 16 | ||||
Direct labor | 24 | 19 | ||||||
Variable manufacturing overhead | 10 | 9 | ||||||
Traceable fixed manufacturing overhead | 20 | 22 | ||||||
Variable selling expenses | 16 | 12 | ||||||
Common fixed expenses | 19 | 14 | ||||||
Total cost per unit | $ | 121 | $ | 92 | ||||
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.
A.) Assume that Cane expects to produce and sell 84,000 Alphas during the current year. A supplier has offered to manufacture and deliver 84,000 Alphas to Cane for a price of $96 per unit. What is the financial advantage (disadvantage) of buying 84,000 units from the supplier instead of making those units?
B.) Assume that Cane expects to produce and sell 54,000 Alphas during the current year. A supplier has offered to manufacture and deliver 54,000 Alphas to Cane for a price of $96 per unit. What is the financial advantage (disadvantage) of buying 54,000 units from the supplier instead of making those units?
(Thank you in advance for your help in understanding these problems!)
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