[The following information applies to the questions displayed below. Cane Compan

Question

[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 unit costs for each product at this level of activity are given below: Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Alpha Beta $30 $10 20 10 23 13 15 25 12 21 17 20 Total cost per unit $125 $ 91 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.

Explanation / Answer

2. The company's total common fixed expenses = $ 20 x 107,000 + $ 15 x 107,000 = $ 3,745,000

10. Make or buy:

If Cane buys Alpha from an outside supplier instead of making, profit will increase by $ 6,867,000 - $ 5,500,000 = $ 1,367,000

15. Contribution margin per unit of raw material:

Beta should be emphasized over Alpha on the basis of contribution margin per pound of raw materials.

Beta would consume 65,000 x 2 or 130,000 pounds of raw materials.

Only 36,000 pounds remain for Alpha. 36,000 pounds means 6,000 units of Alpha. Additional raw materials needed for Alpha.

Cane should be willing to pay upto the Contribution margin of Alpha per pound of raw materials = $ 16 ( $ 5 + $ 11)

Make Buy Purchase cost ( $ 100 x 55,000) $ 5,500,000 Variable cost of manufacturing and selling ( $ 84 x 55,000) $ 4,620,000 Avoidable fixed cost ( $ 21 x 107,000) $ 2,247,000 Total costs $ 6,867,000 $ 5,500,000

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