Question

Cane Company manufactures two products called Alpha and Beta that sell for $185 and $150, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 119,000 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			33				28
Variable manufacturing overhead			20				18
Traceable fixed manufacturing overhead			28				31
Variable selling expenses			25				21
Common fixed expenses			28				23
Total cost per unit		$	174			$	145

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.

9. Assume that Cane expects to produce and sell 93,000 Alphas during the current year. A supplier has offered to manufacture and deliver 93,000 Alphas to Cane for a price of $132 per unit. If Cane buys 93,000 units from the supplier instead of making those units, how much will profits increase or decrease?

FYI - you should find a decrease but I do not know for what amount...?

Answer 1

Hi

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Solution:Increase or Decrease sign can be Negative or positive as per question requirement Particulars Total cost of buying from outside Less Relvant/Avoidable cost of making Alpha 12276000 (93000*132) Variable manufacturing cost Traceable fixed cost (93000) *(40+33+20) 8649000 3332000 Decrease 295000 or $295000