Cane Company manufactures two products called Alpha and Beta that sell for $215

Question

Cane Company manufactures two products called Alpha and Beta that sell for $215 and $160, respectively. Each product uses only one type of raw material that costs $7 per pound. The company has the capacity to annually produce 125,000 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 71,000 Alphas during the current year. A supplier has offered to manufacture and deliver 71,000 Alphas to Cane for a price of $144 per unit. If Cane buys 71,000 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 $215 and $160, respectively. Each product uses only one type of raw material that costs $7 per pound. The company has the capacity to annually produce 125,000 units of each product. Its unit costs for each product at this level of activity are given below:

Explanation / Answer

Per Unit Total Make Buy Make Buy Purchase Price $144 10224000 Direct Material $42 2982000 Direct Labour $35 2485000 Variable Manufacturing Overhead $23 1633000 Traceable Fixed Manufacturing Cost 3875000 Total relevant Costs 10975000 10224000 Incremental Profit 751000 Profit will be increased by $751000, If Canne purchase the Alphas from Supplier.

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