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:

14. 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. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?

Explanation / Answer

As calculated in part 13 :

Alpha Beta

Number of units produced 61000 7800

Explanation:

14. The total contribution margin would be computed as follows:

Alpha Beta

Number of units produced (a) 7,800 61,000

Contribution margin per unit (b) $72 $47

Total contribution margin (a) × (b) $ 561,600 $2,867,000

maximum contribution margin Cane Company can earn given the limited quantity of raw materials = 561600+2867000

= 3,428,600

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