Question

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. 10. Assume that Cane expects to produce and sell 72,000 Alphas during the current year. A supplier has offered to manufacture and deliver 72,000 Alphas to Cane for a price of $148 per unit. What is the financial advantage (disadvantage) of buying 72,000 units from the supplier instead of making those units

Answer 1

Answer:

The financial advantage of buying 72,000 units from the supplier instead of making those units is that Cane would not its traceable fixed manufacturing overhead.  

If we assume that Cane's fixed costs are made up of traceable fixed manufacturing overhead of 60% or $60,000 and 40% of common fixed expenses or $40,000, then $60,000 would not be incurred by Cane in the period it decides to buy from the supplier.

Explanation:

Traceable fixed manufacturing overheads are the expenses that can be traced to production units.  We can say that they are variable with production units or that production gives rise to them.  This implies that when there is production, such costs are incurred, whereas, they are not when there is no production.  They arise due to usage.  For example, more utility energy is consumed based on production.

The common fixed expenses are allocated costs, including administrative expenses, for example.  By their nature, they are generally unavoidable whether Cane decides to produce or buy from the supplier.  And since they must be incurred and allocated, they are not relevant in making a buy or make decision.