Question

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

Answer 1

After calculating the relevant costs, manufacturing the Alpha product in-house results in a savings of $492,000 compared to purchasing the product from the supplier. This suggests that the company should continue to produce the Alpha product rather than buying it.

Step-by-step explanation:

To determine the financial advantage or disadvantage of buying the Alpha product instead of manufacturing it, we need to calculate the total relevant costs of both options. Relevant costs are those costs that will change based on the decision made. In this case, for the make option, we include direct materials, direct labor, variable manufacturing overhead, and traceable fixed manufacturing overhead, because they are avoidable if we choose to buy.

• Direct Materials: $25×82,000 = $2,050,000
• Direct Labor: $22×82,000 = $1,804,000
• Variable manufacturing overhead: $17×82,000 = $1,394,000
• Traceable Fixed Manufacturing Overhead: $18×82,000 = $1,476,000
• Total cost to make: $2,050,000 + $1,804,000 + $1,394,000 + $1,476,000 = $6,724,000

For the buy option, the total cost would be $88×82,000 = $7,216,000.

The calculation shows that the total cost to make the units is cheaper by $7,216,000 - $6,724,000 = $492,000. Therefore, it is financially advantageous to make the product rather than buying it.