Question

Required information [The following information applies to the questions displayed below.] Cane Company manufactures two products called Alpha and Beta that sell for $215 and $160, respectively. Each product uses only one type of raw material that costs $7 per pound. The company has the capacity to annually produce 125,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha $ 42 Beta $ 21 Direct materials Direct labor 35 28 Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses 23 21 31 34 28 24 31 26 $190 $154 Total cost per unit 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 96,000 Alphas during the current year. A supplier has offered to manufacture and deliver 96,000 Alphas to Cane for a price of $144 per unit. What is the financial advantage (disadvantage) of buying 96,000 units from the supplier instead of making those units?

Answer 1

Solution 9:

Differential Analysis- Cane Company - Making Alpha (alt 1) or Buying Alpha (Alt2)
Particulars	Making Alpha (Alt 1)	Buying Alpha (Alt 2)	Financial advantage (Disadvantage) of buying (Alternative 2)
Costs:
Purchase Price (96000*$144)	$0.00	$13,824,000.00	-$13,824,000.00
Direct material	$4,032,000.00	$0.00	$4,032,000.00
Direct Labor	$3,360,000.00	$0.00	$3,360,000.00
Variable manufacturing overhead	$2,208,000.00	$0.00	$2,208,000.00
Avoidable Fixed manufacturing Overhead	$3,875,000.00	$0.00	$3,875,000.00
Total Cost	$13,475,000.00	$13,824,000.00	-$349,000.00

Solution 10:

Differential Analysis- Cane Company - Making Alpha (alt 1) or Buying Alpha (Alt2)
Particulars	Making Alpha (Alt 1)	Buying Alpha (Alt 2)	Financial advantage (Disadvantage) of buying (Alternative 2)
Costs:
Purchase Price (71000*$144)	$0.00	$10,224,000.00	-$10,224,000.00
Direct material	$2,982,000.00	$0.00	$2,982,000.00
Direct Labor	$2,485,000.00	$0.00	$2,485,000.00
Variable mnaufacturing overhead	$1,633,000.00	$0.00	$1,633,000.00
Avoidable Fixed manufacturing Overhead	$3,875,000.00	$0.00	$3,875,000.00
Total Cost	$10,975,000.00	$10,224,000.00	$751,000.00

Solution 11:

Pound of raw material needed per unit of alpha = $42 / $7 = 6 pound

Pound of raw material needed per unit of Beta = $21 / $7 = 3 pound

Computation of contribution margin per pound
Particulars	Alpha	Beta
Selling price per unit	$215.00	$160.00
Variable cost per unit:
Direct material	$42.00	$21.00
Direct labor	$35.00	$28.00
Variable manufacturing overhead	$23.00	$21.00
Variable selling expenses	$28.00	$24.00
Contribution margin per unit	$87.00	$66.00
Raw material required per unit (In pound)	6	3
Contribution margin per pound of material	$14.50	$22.00
Rank	2	1