Question

9. Cane Company manufactures two products called Alpha and Beta that sell for $170 and $130, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 116,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha Beta Direct materials $ 30 $ 18 Direct labor 30 25 Variable manufacturing overhead 20 15 Traceable fixed manufacturing overhead 26 28 Variable selling expenses 22 18 Common fixed expenses 25 20 Total cost per unit $ 153 $ 124 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.

Assume that Cane expects to produce and sell 90,000 Alphas during the current year. A supplier has offered to manufacture and deliver 90,000 Alphas to Cane for a price of $120 per unit. What is the financial advantage (disadvantage) of buying 90,000 units from the supplier instead of making those units?

Answer 1

financial advantage (disadvantage)

$(584000)

	Make	Buy
Cost of purchasing (90,000 units × $120)		10800000
Direct materials (90,000 units × $30)	2700000
Direct labor (90,000 units × $30)	2700000
Variable manufacturing overhead (90,000 units × $20)	1800000
Traceable fixed manufacturing overhead (26*116000)	3016000
TOTAL COSTS	10216000	10800000
Difference in favor of continuing to make the Alphas	$584000