Cane Company manufactures two products called Alpha and Beta that sell for $170

Question

Cane Company manufactures two products called Alpha and Beta that sell for $170 and $130, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 116,000 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 90,000 units of Alpha and 70,000 units of Beta. Also assume that the company’s raw material available for production is limited to 221,000 pounds. How many units of each product should Cane produce to maximize its profits?

Cane Company manufactures two products called Alpha and Beta that sell for $170 and $130, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 116,000 units of each product. Its unit costs for each product at this level of activity are given below:

Explanation / Answer

Solution:

Alpha Beta Sales Price 170 130 Less: Variable cost Direct Material 30 18 Direct Labor 30 25 Variable Manufacturing Overhead 20 15 Variable Selling Expenses 22 18 Contribution = Sales - Variable Cost 68 54 Pounds used per product 30/6 = 5 Pounds 18/6 = 3 pounds Contribution per pound = Contribution / Pounds per product 13.6 18 Ranking Second First

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