Question

[The following information applies to the questions displayed below.] Cane Company manufactures two products called Alpha...

[The following information applies to the questions displayed below.]

Cane Company manufactures two products called Alpha and Beta that sell for \$190 and \$155, respectively. Each product uses only one type of raw material that costs \$8 per pound. The company has the capacity to annually produce 122,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

 Alpha Beta Direct materials \$ 40 \$ 24 Direct labor 34 28 Variable manufacturing overhead 21 19 Traceable fixed manufacturing overhead 29 32 Variable selling expenses 26 22 Common fixed expenses 29 24 Total cost per unit \$ 179 \$ 149

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.

10. Assume that Cane expects to produce and sell 69,000 Alphas during the current year. A supplier has offered to manufacture and deliver 69,000 Alphas to Cane for a price of \$136 per unit. What is the financial advantage (disadvantage) of buying 69,000 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? (Round your answers to 2 decimal places.)

10) Differential analysis

 Make Buy Direct material (69000*40) 2760000 Direct labor 2346000 Variable manufacturing overhead 1449000 Traceable fixed manufacturing overhead (122000*29) 3538000 Purchase cost (69000*136) 9384000 Total relevant cost 10093000 9384000

Financial advantage = 10093000-9384000 = 709000

11) Pounds of raw material

 Alpha Beta Raw material pounds 40/8 = 5 pounds 24/8 = 3

12) Contribution margin per pound

 Alpha Beta Selling price 190 155 variable cost 121 93 Contribution margin per unit 69 62 Pound per unit 5 3 Contribution margin per pound 13.8 20.67

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