Cane Company manufactures two products called Alpha and Beta that sell for $165

Question

Cane Company manufactures two products called Alpha and Beta that sell for $165 and $130, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 113,000 units of each product. Its unit costs for each product at this level of activity are given below:

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’s customers would buy a maximum of 89,000 units of Alpha and 69,000 units of Beta. Also assume that the company’s raw material available for production is limited to 220,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)

Explanation / Answer

Alpha Beta Direct Materials 40 24 Direct Labor 29 25 Variable MOH 15 14 Traceable Fixed MOH 31.74 44.21 Variable Selling Expenses 21 17 Total Costs 136.74 124.21 SP Per Unit 165 130 Profit Per Unit 28.26 5.79 Material in Pounds Required to produce I Unit 5                 3 Profit per Pound 5.65 1.93 Common fixed expenses are unavoidable and hence are sunk costs and will not be considered in decision making Total traceable Fixed MOH for Alpha = $25 X 113000 Units = 2825000 Maximum Units can be Sold for Alpha = 89000 Units Traceable Fixed MOH for Alpha per Unit = 2825000/89000 Units = $31.74 per Unit Total traceable Fixed MOH for Beta = $27 X 113000 Units = 3051000 Maximum Units can be Sold for Beta = 69000 Units Traceable Fixed MOH for BetaAlpha per Unit = 3051000/69000 Units = $44.21 per Unit Total Material in Pounds Required to produce Alpha - 89000 Units X 5 pounds 445000 Beta - 69000 Units X 3 Pounds 207000 Total Material in Pounds 652000 Raw Material AVAILABLE 220000 Raw Material Shortage 432000 Since Profit per pound is of alpha is higher, so we will produce first Alpha from the Available Raw Material So, Raw Material Required, Alpha Material Required 445000 Material Available 220000 Shortage of raw Material for Alpha 225000 In Units = 225000/5 Pounds = 45000 Units Maximum Price per pound to be Paid for Alpha = $5.65 (Profit per Pound) + $8 (price per Pound) = $13.65 per pound Maximum Price per pound to be Paid for Beta = $1.93 (Profit per Pound) + $8 (price per Pound) = $9.93 per pound

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.