Question

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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.)

Answer 1

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