Decision of Making or Buying and Contribution margin:
When a company takes decision, whether to manufacture a component internally or buy from outside it is called make or but decision. While taking the decision, the variable costs of manufacturing the product is compared with the purchase price of the product when bought from the outside supplier.
In relevant costing, the decision to make or buy a product component depends upon the analysis of costs. Avoidable fixed costs and opportunity costs are also considered in the analysis
While finding the contribution margin we have to deduct all the variable costs of manufacturing from selling price.
The total contribution margin it will earn when the production is 8,000 units of Alpha and 60,000 units of Beta.
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- Cane Company manufactures two products called Alpha and Beta that sell for $175 and $135, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 117,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit Alpha $ 40 30 30 18 16 26 29 23 19 26 21 $ 163 $ 130 Beta $15 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. X Answer is complete but not entirely correct. Financial advantage $ 1,407,000 X 3. Assume that Cane expects to produce and sell 91,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who…arrow_forwardCane Company manufactures two products called Alpha and Beta that sell for $175 and $135, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 117,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit Alpha $ 40 30 18 26 23 26 Beta $ 15 30 16 29 19 21 $ 163 $ 130 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. 6. Assume that Cane normally produces and sells 101,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?arrow_forwardCane Company manufactures two products called Alpha and Beta that sell for $175 and $135, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 117,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit Alpha $ 40 30 18 26 23 26 $ 163 Traceable fixed manufacturing overhead 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. Alpha Beta $15 Required: 1. What is the total amount of traceable fixed manufacturing overhead for each of the two products? 30 16 29 19 21 $ 130 Betaarrow_forward
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