Cane Company manufactures two products called Alpha and Beta that sell for $175
ID: 2584672 • Letter: C
Question
Cane Company manufactures two products called Alpha and Beta that sell for $175 and $135, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 117,000 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.
9. Assume that Cane expects to produce and sell 91,000 Alphas during the current year. A supplier has offered to manufacture and deliver 91,000 Alphas to Cane for a price of $124 per unit. What is the financial advantage (disadvantage) of buying 91,000 units from the supplier instead of making those units?
10. Assume that Cane expects to produce and sell 61,000 Alphas during the current year. A supplier has offered to manufacture and deliver 61,000 Alphas to Cane for a price of $124 per unit. What is the financial advantage (disadvantage) of buying 61,000 units from the supplier instead of making those units?
11. How many pounds of raw material are needed to make one unit of each of the two products?
12. What contribution margin per pound of raw material is earned by each of the two products?
13. Assume that Cane’s customers would buy a maximum of 91,000 units of Alpha and 71,000 units of Beta. Also assume that the company’s raw material available for production is limited to 225,000 pounds. How many units of each product should Cane produce to maximize its profits?
14. Assume that Cane’s customers would buy a maximum of 91,000 units of Alpha and 71,000 units of Beta. Also assume that the company’s raw material available for production is limited to 225,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?
15. Assume that Cane’s customers would buy a maximum of 91,000 units of Alpha and 71,000 units of Beta. Also assume that the company’s raw material available for production is limited to 225,000 pounds. If Cane uses its 225,000 pounds of raw materials, up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)
Alpha Beta Direct materials $ 40 $ 15 Direct labor 30 30 Variable manufacturing overhead 18 16 Traceable fixed manufacturing overhead 26 29 Variable selling expenses 23 19 Common fixed expenses 26 21 Total cost per unit $ 163 $ 130Explanation / Answer
Solution:
This is a question of relevant cost and irrelevant cost when company has an idle capacity to produce more product. In case of idle capacity available to the company, the opportunity cost is not arise since the company can increase its production without incurring any additional investment in fixed assets.
IDLE CAPACITY -- It means company has idle capacity and can produce and sold any number of units. In such situation only relevant cost will be considered for decision making.
Relevant Cost is the cost which will incur in future and different under each alternative course of action. It means the cost which will incur in making the special order units are the relevant cost. The following costs are considered as relevant cost:
- Direct material cost
- direct labor cost
- Variable manufacturing overhead
- Variable selling and administrative expenses
- Avoidable fixed manufacturing overhead
The above costs have both the characteristic of relevant cost i.e. it is a future cost and different under each alternative course of action.
Irrelevant cost is the cost which do not play any role in decision making. Irrelevant Cost is the SUNK Cost which has already been incurred and does not change whether company produce more product or produce less product.
Calculation of Relevant Cost related to Alpha
Alpha
Direct materials
40
Direct labor
30
Variable manufacturing overhead
18
Traceable fixed manufacturing overhead (included since it is directly related to the Alpha product)
26
Variable selling expenses
23
Relevant Cost per unit
137
Part 9 --- Cane expects to produce and sell 91,000 Alphas during the current year. A supplier has offered to manufacture and deliver 91,000 Alphas to Cane for a price of $124 per unit. What is the financial advantage (disadvantage) of buying 91,000 units from the supplier instead of making those units
Relevant Cost related to Alpha Product if Cane make the product IN HOUSE = $137 per unit
Price offered by outside Supplier = $124 per unit
If Can company accept the offer and buy from outside supplier, the financial advantage per unit will be $13 per unit (137 – 124)
Total Financial Advantage of buying 91,000 Units from outside supplier = $13 per unit x 91,000 units = $1,183,000
Part 10 --- Assume that Cane expects to produce and sell 61,000 Alphas during the current year. A supplier has offered to manufacture and deliver 61,000 Alphas to Cane for a price of $124 per unit. What is the financial advantage (disadvantage) of buying 61,000 units from the supplier instead of making those units
As calculated in Part 9, the financial advantage per unit of buying the Alpha from outside = $13 per unit
Total Financial Advantage of buying 61,000 Units from outside supplier = 13 x 61,000 Units = $793,000
Part 11 --- How many pounds of raw material are needed to make one unit of each of the two products?
Alpha
Beta
Direct materials cost per unit (A)
$40
$15
Raw material cost per pound (B)
$5
$5
Pounds of raw material needed to make one unit (A/B)
8 Pounds
(40/5)
3 Pounds
(15/5)
Pounds of raw material needed to make one unit of Alpha = 8 Pounds
Pounds of raw material needed to make one unit of Beta = 3 Pounds
Part 12. What contribution margin per pound of raw material is earned by each of the two products
Alpha
Beta
Unit Selling Price (A)
$175
$135
Variable Cost per unit:
Direct materials
$40
$15
Direct labor
$30
$30
Variable manufacturing overhead
$18
$16
Variable selling expenses
$23
$19
Total Variable Cost per unit (B)
$111
$80
Contribution Margin Per Unit (A - B)
$64
$55
/ Raw materials needed per unit
8 Pounds
3 Pounds
Contribution margin per pound of raw material
$8.00
(64 / 8)
$18.33
(55/3)
Contribution margin per pound of raw material for Alpha = $8 per pound
Contribution margin per pound of raw material for Beta = $18.33 per pound
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Pls ask separate question for remaining parts.
Alpha
Direct materials
40
Direct labor
30
Variable manufacturing overhead
18
Traceable fixed manufacturing overhead (included since it is directly related to the Alpha product)
26
Variable selling expenses
23
Relevant Cost per unit
137
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