Required information The Foundational 15 [LO12-2, LO12-3, LO12-4, LO12-5, LO12-6

Question

Required information The Foundational 15 [LO12-2, LO12-3, LO12-4, LO12-5, LO12-6] Part 14 of 15 [The following information applies to the questions displayed below. Cane Company manufactures two products called Alpha and Beta that sell for $140 and $100, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 106,000 units of each product. Its average cost per unit for each product at this level of activity are given below: points Alpha Beta S 32 $16 19 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit eBook 24 10 20 16 $121 Print 12 14 $92 Reference The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are unavoidable and have been allocated to products based on sales dollars. Foundational 12-14 14. Assume that Cane's customers would buy a maximum of 84,000 units of Alpha and 64,000 units of Beta. Also assume that the company's raw material available for production is limited to 166,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials? Total contribution in This is a numeric

Explanation / Answer

Cane Company

Determination of maximum contribution margin the company can earn given the limited quantity of raw materials:

Alpha

Beta

Selling price per unit

$140

$100

Variable costs per unit:

direct materials

$32

$16

Direct labor

$24

$19

variable manufacturing overhead

$10

$9

variable selling expense

$16

$12

Total variable cost per unit

$82

$56

Contribution margin per unit

$58

$44

direct material cost per pound

$8

$8

number of pounds per unit

32/8 = 4

16/8 =2

contribution margin per pound

58/4 =$14.50

44/2 = $22

Ranking                                   II                     I

Since the contribution margin per pound of raw material for Beta is higher than that of Alpha, the limited raw materials should be first used to produce maximum units of Beta.

Maximum demand for Beta = 64,000 units
raw materials needed = 64,000 x 2 = 128,000 pounds

Available raw materials = 166,000 pounds

Remaining raw material in pounds = 38,000 pounds

The number of units of Alpha that can be produced using 38,000 pounds = 38,000/4 = 9,500 units

Alpha

Beta

sales units

9,500

64,000

contribution margin per unit

$58

$44

total contribution margin

$551,000

$2,816,000

$3,367,000

Hence, total contribution margin at optimal product mix of Alpha (9,500 units) and Beta (64,000 units) = $3,367,000

Alpha

Beta

Selling price per unit

$140

$100

Variable costs per unit:

direct materials

$32

$16

Direct labor

$24

$19

variable manufacturing overhead

$10

$9

variable selling expense

$16

$12

Total variable cost per unit

$82

$56

Contribution margin per unit

$58

$44

direct material cost per pound

$8

$8

number of pounds per unit

32/8 = 4

16/8 =2

contribution margin per pound

58/4 =$14.50

44/2 = $22

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