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:

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 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. How many units of each product should Cane produce to maximize its profits?

14. 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?

15. 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. Up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)

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:

Explanation / Answer

13) contribution of Alpha per pound of raw material = (150 - variable cost $87) / 6 = $63 / 6 = $10.50 per pound

contribution of Beta per pound of raw material= (110 - variable cost $62) / 3 = $48 /3 = $16 per pound

Maximum contribution per pound of raw material is of Beta, so units of each product should Cane produce to maximize its profits = Beta = 198000 / 3 = 66000 units and Alpha = (210000 - 198000) /6 = 2000 units .

Thus, 66000 units of Beta and 2000 units of Alpha will produce maximum profits for Cane.

14) The maximum contribution margin Cane Company can earn given the limited quantity of raw materials=

Beta = 66000 * $48 + 2000 * 63 = $3,294,000

15)

The company should be willing to pay $16 more for the additional pound of raw-material i.e Raw material price could be $21 and the product line reach out to break even point.

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