Question

Required information [The following information applies to the questions displayed below.] Cane Company manufactures two products called Alpha and Beta that sell for $150 and $105, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 107,000 units of each product. Its average cost per unit for each product at this level of activity are given below Alpha Beta $10 20 10 23 13 15 $91 $ 30 25 12 21 17 20 $125 Direct materials Direct labor variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses 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. 10. Assume that Cane expects to produce and sell 55,000 Alphas during the current year. A supplier has offered to manufacture and deliver 55,000 Alphas to Cane for a price of $100 per unit. What is the financial advantage (disadvantage) of buying 55,000 units from the supplier instead of making those units? Financial (disadvantage) Financial advantage

Answer 1

Answer 10.

Differential Analysis- Cane Company - Making Alpha (alt 1) or Buying Alph (Alt2)
Particulars	Making Alpha (Alt 1)	Buying Alpha (Alt 2)	Financial advantage (Disadvantage) of buying (Alternative 2)
Costs:
Purchase Price (50000*$80)	$0.00	$5,500,000	-$5,500,000
Direct material	$1,650,000	$0.00	$1,650,000.00
Direct Labor	$1,375,000	$0.00	$1,375,000.00
Variable manufacturing overhead	$660000	$0.00	$660,000.00
Avoidable Fixed manufacturing Overhead	$2247000	$0.00	$2247000
Total Cost	$5,932,000.00	$5,500,000.00	$432000

Financial advantage =  $ 432,000

Answer 11.

Pounds of raw material needed to make one unit of:

Alpha=$30/5 = 6 pound per unit

Beta=$10/5 = 2 pound per unit

Answer 12.

	Alpha	beta
Sales revenue(per unit)	$150	$105
Less variable cost per unit	$84 (30+25+12+17)	$53 (10+20+10+13)
Contribution margin	$66	$52
Pounds of direct material needed to produce 1 unit	6	2
Contribution margin per pound	$11	$26

Answer 13.

Optimal no. Of units to produce would be computed as:

Product	pound per unit	unit produced	total pounds
Beta	2	65000	130000
Alpha	6	6000	36000

Answer 14.

The total contribution margin would be computed as follow:

	Alpha	Beta
No. Of units produced	6000	65000
Contribution margin per unit	$66	$52
Total contribution margin	$396,000	$3,380,000

Company total contribution margin would be $3,776,000 [396000+3380000]

Answer 15.

The maximum price per pound is computed as follows:

Alpha

Regular direct material cost per pound = $5

Contribution margin per pound of direct materials = 11

Maximum price to be paid per pound = 5 + 11 = $16

Because the company has satisfied all demand for Betas, it would use additional raw materials to produce Alphas.