Cane Company manufactures two products called Alpha and Beta that sell for $130
ID: 2531712 • Letter: C
Question
Cane Company manufactures two products called Alpha and Beta that sell for $130 and $90, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 102,000 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.
Questions: (Please show all work/steps)
9. Assume that Cane expects to produce and sell 82,000 Alphas during the current year. A supplier has offered to manufacture and deliver 82,000 Alphas to Cane for a price of $88 per unit. What is the financial advantage (disadvantage) of buying 82,000 units from the supplier instead of making those units?
Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit Alpha Beta $10 21 7 20 10 12 $ 25 17 18 14 17 $113 $ 80Explanation / Answer
Financial advantage of buying 82,000 units from the supplier instead of making those units = $656000
Explanation;
If 82000 units are produced & sold;
Selling price per unit
$130
Number of units to be produces and sold
82000
Total sales revenue ($130 * 82000)
$10660000
Less:
Total cost per unit
$113
Number of units to be produces and sold
82000
Total costs (82000 *$113)
($9266000)
Net profits when units are produced & sold
$1394000
If 82000 units are purchased from suppliers & sold;
Selling price per unit
$130
Number of units to be produces and sold
82000
Total sales revenue ($130 * 82000)
$10660000
Purchase price per unit
$88
Unavoidable fixed cost per unit
$17
Total cost per unit when purchased from supplier
$105
Total number of units
82000
Total cost for 82000 units (82000 * $105)
($8610000)
Net profits when units are purchased & sold
$2050000
Net increase in net income when purchased from suppliers & sold ($2050000 – $1394000)
$656000
Hence it is clear that when 82000 units are purchased from supplier then net income will be higher by $656000
If 82000 units are produced & sold;
Selling price per unit
$130
Number of units to be produces and sold
82000
Total sales revenue ($130 * 82000)
$10660000
Less:
Total cost per unit
$113
Number of units to be produces and sold
82000
Total costs (82000 *$113)
($9266000)
Net profits when units are produced & sold
$1394000
If 82000 units are purchased from suppliers & sold;
Selling price per unit
$130
Number of units to be produces and sold
82000
Total sales revenue ($130 * 82000)
$10660000
Purchase price per unit
$88
Unavoidable fixed cost per unit
$17
Total cost per unit when purchased from supplier
$105
Total number of units
82000
Total cost for 82000 units (82000 * $105)
($8610000)
Net profits when units are purchased & sold
$2050000
Net increase in net income when purchased from suppliers & sold ($2050000 – $1394000)
$656000
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