Cane Company manufactures two products called Alpha and Beta that sell for $225

Question

Cane Company manufactures two products called Alpha and Beta that sell for $225 and $175, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 130,000 units of each product. Its average cost per unit 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 unavoidable and have been allocated to products based on sales dollars.

1. Assume that Cane expects to produce and sell 74,000 Alphas during the current year. A supplier has offered to manufacture and deliver 74,000 Alphas to Cane for a price of $156 per unit. What is the financial advantage (disadvantage) of buying 74,000 units from the supplier instead of making those units?

2. Assume that Cane’s customers would buy a maximum of 99,000 units of Alpha and 79,000 units of Beta. Also assume that the company’s raw material available for production is limited to 344,000 pounds. If Cane uses its 344,000 pounds of raw materials, up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)

Alpha Beta Direct materials $ 42 $ 24 Direct labor 42 32 Variable manufacturing overhead 26 24 Traceable fixed manufacturing overhead 34 37 Variable selling expenses 31 27 Common fixed expenses 34 29 Total cost per unit $ 209 $ 173

Explanation / Answer

1.

As the total costs for buying is lower than the total cost for making then there is a financial advantage of buying 74,000 units from the supplier. The amount of financial advantage is $1,016,000

Explanation: Variable selling expenses and common fixed expenses will be incurred whether the offer is accepted or not and hence have not been included in the above calculation.

2. We will first compute pounds of raw material needed to make one unit of Alpha and Beta.

The next step is to compute contribution margin per pound of raw material.

(Note that variable costs = direct materail+direct labor+variable manufacturing overhead+variable selling expenses) (12 = 84/7) (17 = 68/4)

As contribution margin per pound for Beta is more than Alpha the requirements for Beta will be met first and hence additional raw materials will be needed for Alpha.

Now, regular cost per pound = $6. Contribution margin per pound for Alpha = $12.

Thus maximum price per pound of additional raw materails that it will be willing to pay = 6+12 = $18.00

Make Buy Units 74,000 Cost of buying (74000*$156) 11,544,000 Direct materials (74000*42) 3,108,000 Direct labor (74000*42) 3,108,000 Variable manufacturing overhead (74000*26) 1,924,000 Traceable fixed manufacturing overhead (130000*34) 4,420,000 Variable selling expenses 0 Common fixed expenses 0 Total costs 12,560,000 11,544,000 Difference in cost 1,016,000

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