Cane Company manufactures two products called Alpha and Beta that sell for $150

Question

Cane Company manufactures two products called Alpha and Beta that sell for $150 and $110, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 108,000 units of each product. Its unit costs for each product at this level of activity are given below: Alpha Beta Direct materials $ 30 $ 15 Direct labor 26 22 Variable manufacturing overhead 13 11 Traceable fixed manufacturing overhead 22 24 Variable selling expenses 18 14 Common fixed expenses 21 16 Total cost per unit $ 130 $ 102 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 expects to produce and sell 96,000 Betas during the current year. One of Cane’s sales representatives has found a new customer that is willing to buy 2,000 additional Betas for a price of $45 per unit. If Cane accepts the customer’s offer, how much will its profits increase or decrease? Assume that Cane’s customers would buy a maximum of 86,000 units of Alpha and 66,000 units of Beta. Also assume that the company’s raw material available for production is limited to 210,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?

Explanation / Answer

If he sells additional beta then amount pai by them is $ 45.That is less than variable cost so it should not accept this offer.

Alpha Beta Direct Material 30 15 Direct Labor 26 22 Variable manufacturing overhead 13 11 Tracable fixed manufacturing overhead 22 24 Variable selling exp 18 14 Common Fixed Exp 21 16 130 102 Sales Price 150 110 Units 86000 66000 Tracable fixed manufacturing overhead cost can be ignored Total Cost 130 102 Less Avoidable cost 22 24 Net cost 108 78 Sales 12900000 7260000 Less Variable Cost (86000*87 / 66000*62) 7482000 4092000 Contribution 5418000 3168000 Less Fixed Cost (86000*21 / 66000 * 16) 1806000 1056000 Profit 3612000 2112000

If he sells additional beta then amount pai by them is $ 45.That is less than variable cost so it should not accept this offer.

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