Question

Cane Company manufactures two products called Alpha and Beta that sell for $150 and $105, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 107,000 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			$	10
Direct labor			25				20
Variable manufacturing overhead			12				10
Traceable fixed manufacturing overhead			21				23
Variable selling expenses			17				13
Common fixed expenses			20				15
Total cost per unit		$	125			$	91

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 85,000 Alphas during the current year. A supplier has offered to manufacture and deliver 85,000 Alphas to Cane for a price of $100 per unit. What is the financial advantage (disadvantage) of buying 85,000 units from the supplier instead of making those units?

Answer 1

Cost under Buying decision:
Buying cost	=	85,000 X $100 per unit	=	$   85,00,000
Cost under Making decision:
Direct Materials	=	85,000 X $30 per unit	=	$   25,50,000
Direct Labor	=	85,000 X $25 per unit	=	$   21,25,000
Variable Manufacturing overheads	=	85,000 X $12 per unit	=	$   10,20,000
Traceable fixed Manufacturing overheads	=	1,07,000 X $21 per unit	=	$   22,47,000
Making cost	=		=	$   79,42,000
Financial advantage / (disadvantage) if units are purchased from supplier than manufaturing	=	Making Cost - Buying cost
(loss)	=	$79,42,000 - $85,00,000	=	$   -5,58,000