Cane Company manufactures two products called Alpha and Beta that sell for $170

Question

Cane Company manufactures two products called Alpha and Beta that sell for $170 and $130, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 116,000 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.

11. How many pounds of raw material are needed to make one unit of Alpha and one unit of Beta?

12. What contribution margin per pound of raw material is earned by Alpha and Beta? (Round your answers to 2 decimal places.)

13. Assume that Cane’s customers would buy a maximum of 90,000 units of Alpha and 70,000 units of Beta. Also assume that the company’s raw material available for production is limited to 221,000 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 90,000 units of Alpha and 70,000 units of Beta. Also assume that the company’s raw material available for production is limited to 221,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?

Total Contribution Margin: _______________

15. Assume that Cane’s customers would buy a maximum of 90,000 units of Alpha and 70,000 units of Beta. Also assume that the company’s raw material available for production is limited to 221,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)

Maximum price to be paid per pound: ________

Alpha Beta Direct materials $ 30 $ 18 Direct labor 30 25 Variable manufacturing overhead 20 15 Traceable fixed manufacturing overhead 26 28 Variable selling expenses 22 18 Common fixed expenses 25 20 Total cost per unit $ 153 $ 124

Explanation / Answer

Solution 11

Pound of raw material required to make one unit of Alpha and one unit of beta.

5

($30/$6)

3

($18/$6)

Solution 12

Contribution margin per pound of raw material

First we calculate contribution

Now we calculate contribution per pound of raw material

Solution 13 Limiting factor and maximisation of profit

Rank allocation

Second production for any remaining pound of raw material

(Contribution margin per pound of raw material is lower)

First production

(Contribution margin per pound of raw material is higher)

calculation of optimum Number of units to be produced to maximise profit

2200

(11000/5)

Hence units produced

Solution 14 Contribution at optimal production

Total contribution margin

Solution 15 Calculation of maximum price which can be paid per pound for additional raw materials.

Since Additional raw material are required for production of units of alpha hence calculation will based on alpha product

Particulars Alpha Beta Raw material cost per unit $30 $18 Raw material price per pound $6 $6 Raw material required per unit

5

($30/$6)

3

($18/$6)

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