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 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

Computation of Financial Advantages 68,44,000 Cost OF Buying Alpha From Outsider $ (59000 units*$116 per unit) Less: Avoidable Costs Direct Material (59000*40) $ Direct Labor (59000*$29) $ Variable Mfg Overheads (59000*15) $ Treaceble Fixed Overhead (113000*25 $ Variable Selling Expenses (59000*21) $ 23,60,000 17,11,000 8,85,000 28,25,000 12,39,000 Financial Advantages $ 21,76,000