Required information The Foundational 15 L0122 L0123 LO124 L

Required information The Foundational 15 (L012-2, L012-3, LO12-4, LO12-5, L012-6] The following information applies to the questions displayed below. Cane Company manufactures two products called Alpha and Beta that sell for $180 and $145, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 118,000 units of each product. Its average cost per unit for each product at this level of activity are given below Alpha Beta Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit s 36 32 19 27 24 s 24 27 17 30 20 2722 $140 $165 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. Foundational 12-9 9. Assume that Cane expects to produce and sell 92,000 Alphas during the current year. A supplier has offered to manufacture and deliver 92,000 Alphas to Cane for a price of $128 per unit. What is the financial advantage (disadvantage) of buying 92,000 units from the supplier instead of making those units?

Solution

9.

Cost of buying 92,000 Alphas = 92,000 x $ 128 / unit = $ 11,776,000.

Total avoidable manufacturing costs for 92,000 units = 92,000 x $ ( 36 + 32 + 19 + 27) = $ 10,488,000

Financial advantage ( disadvantage) of buying 92,000 Alphas from supplier = $ 10,488,000 - $ 11,776,000 = $ ( 1,288,000)

Financial Advantage ( Disadvantage ) of buying from supplier

$ ( 1,288,000)