Cane Company manufactures two products called Alpha and Beta that sell for $195
ID: 2474255 • Letter: C
Question
Cane Company manufactures two products called Alpha and Beta that sell for $195 and $150, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 123,000 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 70,000 Alphas during the current year. A supplier has offered to manufacture and deliver 70,000 Alphas to Cane for a price of $140 per unit. If Cane buys 70,000 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 $195 and $150, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 123,000 units of each product. Its unit costs for each product at this level of activity are given below:
Explanation / Answer
If making
If Purchased from supplier
No of units expects to produce and sell or buy
70,000 units
70,000 units
Selling price or buying price
195 per unit
195 per unit
Total Cost per unit
183per unit
164 (140 buying price + 27(Variable selling expenses)
Profit per unit
12
31
Incremental profit
$1,330,000 (70,000 units * (31-12)
Profit will increase by $1,330,000
Note:
Since the Traceable fixed overheads are avoidable, hence those cost are not considered.
If Alpha is purchased from supplier, than the total common fixes expenses are charged to Beta product.
If making
If Purchased from supplier
No of units expects to produce and sell or buy
70,000 units
70,000 units
Selling price or buying price
195 per unit
195 per unit
Total Cost per unit
183per unit
164 (140 buying price + 27(Variable selling expenses)
Profit per unit
12
31
Incremental profit
$1,330,000 (70,000 units * (31-12)
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