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: Alpha Beta Direct materials $ 25 $ 10 Direct labor 22 21 Variable manufacturing overhead 17 7 Traceable fixed manufacturing overhead 18 20 Variable selling expenses 14 10 Common fixed expenses 17 12 Total cost per unit $ 113 $ 80 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 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

Cane Company

The financial advantage of buying 82,000 units from the supplier instead of making those units is:

= $656,000.

Explanation:

a) Data and Calculations:

                                                               Alpha       Beta

Selling price                                             $130        $90

Annual production capacity              102,000    102,000 units

Direct materials per unit                          $25            $10

Direct labor                                                 22              21

Variable manufacturing overhead             17                7

Traceable fixed manufacturing overhead 18             20

Variable selling expenses                          14              10

Common fixed expenses                           17              12

Total cost per unit                                  $ 113         $ 80

Cost of Alphas                                     Make          Buy        Difference

Direct materials per unit                          $25      

Direct labor                                                 22          

Variable manufacturing overhead             17      

Traceable fixed manufacturing overhead 18        

Variable selling expenses                          14        

Total cost per unit                                  $ 96        $ 88           $ 8

Expected production/sales and purchase 82,000  82,000    82,000

Total cost or producing or buying    $7,872,00   $7,216,000  $656,000

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