Cane Company manufactures two products called Alpha and Beta that sell for $185
ID: 2380377 • Letter: C
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:
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.
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? (Input the amount as positive value.)
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:
Explanation / Answer
IF CANE expects to produce and sell 93,000 Alphas during the current year TOTAL COST THAT WOULD INCUR WOULD BE = 93000*118+ 3332000
=14306000
TOTAL COST PER UNIT =14306000/93000
=153.83 p.u.
Profit p.u. = 185-153.83
=31.17
If Cane buys 93,000 units from the supplier instead of making those units THEN PROFIT WOULD BE = 185-132
=47 p.u.
PROFIT WOULD INCREASE BY 47-31.17
=15.83 p.u.
PERCENTAGE INCREASE IN PROFIT = (15.83/31.17)*100
=50.79%
WORKING NOTE - 1: FIXED COST
=119000*28
=3332000
WORKING NOTE -2 : VARIABLE COST PER UNIT
Direct material $ 40
Direct labor 33
Variable manufacturing overhead 20
Traceable fixed manufacturing overhead
[SINCE IT CAN BE AVOIDED IT IS ASSUMED THAT IT HAS BEEN AVIIDED
NIL
Variable selling expenses 25
Total Variable cost per unit $ 118
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