Cane Company manufactures two products called Alpha and Beta that sell for $195

Question

Cane Company manufactures two products called Alpha and Beta that sell for $195 and $150, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 123,000 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.

13. Assume that Cane’s customers would buy a maximum of 95,000 units of Alpha and 75,000 units of Beta. Also assume that the company’s raw material available for production is limited to 245,000 pounds. How many units of each product should Cane produce to maximize its profits?

14. Assume that Cane’s customers would buy a maximum of 95,000 units of Alpha and 75,000 units of Beta. Also assume that the company’s raw material available for production is limited to 245,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?

15. Assume that Cane’s customers would buy a maximum of 95,000 units of Alpha and 75,000 units of Beta. Also assume that the company’s raw material available for production is limited to 245,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials?

Alpha Beta   Direct materials $ 40 $ 15   Direct labor 34 28   Variable manufacturing overhead 22 20   Traceable fixed manufacturing overhead 30 33   Variable selling expenses 27 23   Common fixed expenses 30 25   Total cost per unit $ 183 $ 144

Explanation / Answer

13)

As per ranking , Produce Beta upto maximum demand and than produce Alpha from available of raw material to maximize its profits

Raw Material used in producing Maximum 75000 unit of beta = 75000*3 = 225000

No of Unit to be produced of Product Beta = 75000

Raw material available after producing Beta = 245000-225000 = 20000

No of Unit to be produced of Product Alpha = 20000/8 = 2500

Answer

No of Unit to be produced of Product Alpha = 2500

No of Unit to be produced of Product Beta = 75000

14)

Maximum contribution margin Cane Company can earn = No of Unit to be produced of Product Alpha *Unit Contribution margin +  No of Unit to be produced of Product Beta *Unit Contribution margin

Maximum contribution margin Cane Company can earn = 2500*72 + 75000*64

Maximum contribution margin Cane Company can earn = $ 4,980,000

15) Maximum Company would it be willing to pay per pound for additional raw materials =  Raw material cost per pound + Contribution Margin per pound of product alpha

Maximum Company would it be willing to pay per pound for additional raw materials = 5 + 9

Maximum Company would it be willing to pay per pound for additional raw materials = $ 14

Working

Alpha

Direct material Required per unit = Direct Material cost per unit/Direct material per pound

Direct material Required per unit = 40/5

Direct material Required per unit = 8 pound

Beta

Direct material Required per unit = Direct Material cost per unit/Direct material per pound

Direct material Required per unit = 15/5

Direct material Required per unit = 3 pound

Alpha Beta Sell Price [A] 195 150   Direct materials 40 15   Direct labor 34 28   Variable manufacturing overhead 22 20   Variable selling expenses 27 23 Total Variable cost [B] 123 86 Contribution Margin [C = A-B] 72 64 Direct material Required per unit [D] 8 3 Contribution Margin per pound [E = C/D]           9.00         21.33 Ranking II I

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