Question

Cane Company manufactures two products called Alpha and Beta that sell for $140 and $100, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 106,000 units of each product. Its unit costs for each product at this level of activity are given below:

Direct materials: Alpha :$32 Beta: $16
Direct labor: Alpha: 24 Beta: 19
Variable manufacturing overhead: Alpha: 10 Beta: 9
Traceable fixed manufacturing overhead: Alpha: 20 Beta:22
Variable selling expenses: Alpha: 16 Beta: 12
Common fixed expenses: Alpha: 19 Beta: 14
Total cost per unit: Alpha: $121 Beta: $92
The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are deemed unavoidable and have been allocated to products based on sales dollars.
Assume that Cane expects to produce and sell 84,000 Alphas during the current year. A supplier has offered to manufacture and deliver 84,000 Alphas to Cane for a price of $96 per unit. If Cane buys 84,000 units from the supplier instead of making those units, how much will profits increase or decrease?

Answer 1

It is cheaper to keep making the units in-house. Income will decrease in $840,000 if Cane buys the units.

Step-by-step explanation:

Giving the following information:

Direct materials: Alpha :$32

Direct labor: Alpha: 24

Variable manufacturing overhead: Alpha: 10

Traceable fixed manufacturing overhead: Alpha: 20

Offer= 84,000 units for $96 each.

We need to calculate the total cost of producing or buying, and determine the best option for the company.

Production:

Total cost= (32 + 24 + 10 + 20)*84,000= $7,224,000

Buy:

Total cost= 84,000*96= $8,064,000

It is cheaper to keep making the units in-house. Income will decrease in $840,000