Cane Company manufactures two products called Alpha and Beta that sell for $205

Question

Cane Company manufactures two products called Alpha and Beta that sell for $205 and $164, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 127,000 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 97,000 units of Alpha and 77,000 units of Beta. Also assume that the company’s raw material available for production is limited to 247,000 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 97,000 units of Alpha and 77,000 units of Beta. Also assume that the company’s raw material available for production is limited to 247,000 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 97,000 units of Alpha and 77,000 units of Beta. Also assume that the company’s raw material available for production is limited to 247,000 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 $205 and $164, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 127,000 units of each product. Its unit costs for each product at this level of activity are given below:

Explanation / Answer

Answer:

Particulars                                                               Alpha                             Beta                   

Selling Price                                                    $ 205                                 $ 164

Less:

Direct Material                                                 $ 40 ( 5 pounds)                 $ 24 (3 pounds)

Direct Labor                                                     $ 37                                    $ 30

Variable Manufacturing Overheads                  $ 24                                    $ 22

Variable Selling Overheads                             $ 29                                     $ 25

Contribution Margin                                         $ 75                                     $ 63

Less: Traceble Fixed Cost                                $ 32                                    $ 35

Profitability associated per unit                        $ 43                                     $ 28

13.

Total Raw Material available = 247,000 pounds, maximum demand for Alpha is 97,000 units and that of Beta is 77,000 units.

Using the vailable quantity of raw material the Company can produce either;

a. 247,000 / 5 = 49,400 units of Alpha to earn 49,400 x $ 43 = $ 2,124,200; or

b. 247,000 / 3 = 82,333 units of Beta to earn 77,000 x $ 28 = $ 2,156,000 and remaining units is stock; or

c. 77,000 units of Beta to earn $ 2,156,000 and (247,000 - 77,000 x 3) / 5 = 3,200 units of Alpha and earn $ 137,600 additional; that is total earning = $ 2,293,600

Therefore, the Company shall go with option c. and earn maximum profit of $ 2,293,600

14.

The maximum contribution margin that can be earned by the Company = 77,000 x $ 63 + 3,200 x $ 75 = $ 5,091,000

15.

The Company shall not pay any amount higher than $ 43 (associated profitability with Alpha) for additional raw materials.

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