Cane Company manufactures two products called Alpha and Beta that sell for $185

Question

Cane Company manufactures two products called Alpha and Beta that sell for $185 and $120, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 112,000 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 88,000 Alphas during the current year. A supplier has offered to manufacture and deliver 88,000 Alphas to Cane for a price of $112 per unit. If Cane buys 88,000 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 $120, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 112,000 units of each product. Its unit costs for each product at this level of activity are given below:

Explanation / Answer

cost comparison -whether to buy or manufacture product Alpha

If the entire units of 88000 of alpha is manufactured

the following cost would be incurred.

Direct Material                            $ 30

Direct labor                                 $ 22

Variable manufacturing overhead                $20

Traceable fixed manufacturing overhead      $24

Variable selling expense                            $20

Total variable cost per unit                     $116

Total price if purchased from outside    $112

Savings by purchasing outside           $ 4

There is a savings of $4 if Cane purchases Alpha from outside.

Fixed cost is not considered because , they are spent irrespective of the decision to buy or sell .

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