Question

Cane Company manufactures two products called Alpha and Beta that sell for $165 and $130, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 113,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Beta Alpha $ 40 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit $154 $126 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. 10. Assume that Cane expects to produce and sell 59,000 Alphas during the current year. A supplier has offered to manufacture and deliver 59,000 Alphas to Cane for a price of $116 per unit. What is the financial advantage (disadvantage) of buying 59,000 units from the supplier instead of making those units? Answer is complete but not entirely correct. Financial advantage s 767,000®

Answer 1

(10) -- Assume that Cane expects to produce and sell 59000 Alphas during the current year. A supplier has offered to manufacture and deliver 59000 Alphas to cane for a price of $116 per unit. What is the financial advantage (disadvantage) of buying 59000 units from the supplier instead of making those units?

Answer -

Calculation of the Financial advantage (disadvantage) of buying 59000 units of Alphas from the supplier -

	Particulars	Calculations	Amount ($)
A.	Cost of Buying	[59000 units * $116]	6844000
	Cost of Making
	Direct materials	[59000 units * $40]	2360000
	Direct labor	[59000 units * $29]	1711000
	Variable manufacturing overhead	[59000 units * $15]	885000
	Traceable fixed manufacturing overhead	[113000 units * $25]	2825000
B.	Total Cost of Making	[$2360000+$1711000+$885000+$2825000]	7781000
Financial Advantage of Buying 59000 units of Alphas  [B-A]		[$7781000-$6844000]	937000