Cane Company manufactures two products called Alpha and Beta that sell for $120 and $80, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 100,000 units of each product. Its unit costs for each product at this level of activity are given below:
Alpha Beta
Direct materials $ 30 $ 12
Direct labor 20 15
Variable manufacturing overhead 7 5
Traceable fixed manufacturing overhead 16 18
Variable selling expenses 12 8
Common fixed expenses 15 10
Total cost per unit $ 100 $ 68
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.
Required:
Assume that Cane expects to produce and sell 80,000 Alphas during the current year. A supplier has
offered to manufacture and deliver 80,000 Alphas to Cane for a price of $80 per unit. If Cane buys 80,000 units from the supplier instead of making those units, how much will profits increase or decrease? (Input the amount as positive value.)
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This is confusing me because I know that direct material, direct labor, and variable overhead are included. I'm pretty sure selling expenses and common costs wouldn't be a factor. However, both 80 - 57 = 23 x 80,000 = 1,840,000 and 80 - 73 = 7 x 80,000 = 560,000 get me incorrect answers. So, I'm confused.
Alpha Beta
Direct materials $ 30 $ 12
Direct labor 20 15
Variable manufacturing overhead 7 5
Traceable fixed manufacturing overhead 16 18
Variable selling expenses 12 8
Common fixed expenses 15 10
Total cost per unit $ 100 $ 68
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.
Required:
Assume that Cane expects to produce and sell 80,000 Alphas during the current year. A supplier has
offered to manufacture and deliver 80,000 Alphas to Cane for a price of $80 per unit. If Cane buys 80,000 units from the supplier instead of making those units, how much will profits increase or decrease? (Input the amount as positive value.)
---
This is confusing me because I know that direct material, direct labor, and variable overhead are included. I'm pretty sure selling expenses and common costs wouldn't be a factor. However, both 80 - 57 = 23 x 80,000 = 1,840,000 and 80 - 73 = 7 x 80,000 = 560,000 get me incorrect answers. So, I'm confused.