Cane Company manufactures two products called Alpha and Beta that sell for $125

Question

Cane Company manufactures two products called Alpha and Beta that sell for $125 and $85, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 101,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

Alpha Beta

Direct materials $ 30 $12

Direct labor 21 20

Variable manufacturing overhead 8 6

Traceable fixed manufacturing overhead 17 19

Variable selling expenses 13 9

Common fixed expenses 16 11

Total cost per unit $105 $77

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.

Questions:

13. Assume that Cane’s customers would buy a maximum of 81,000 units of Alpha and 61,000 units of Beta. Also assume that the company’s raw material available for production is limited to 161,000 pounds. How many units of each product should Cane produce to maximize its profits?

Explanation / Answer

Product PoundsPerUnit UnitProduced TotalPounds

Beta 2 61,000 122,000

Alpha 5 7,800 39,000

Totalpounds available 161,000

The company should produce Beta first because it earns the highest contribution margin per pound of raw materials. After customer demand for Beta has been satisfied by producing 61,000 units, there are 39,000 pounds (161000 - 122000) of raw materials remaining to use for making Alphas. Since each Alpha requires 5 pounds of raw materials, the company would be able to produce 7,800 Alphas (39,000 pounds ÷ 5 pounds per unit) before running out of rawmaterials

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