15 Required information The Foundational 15 [LO12-2, LO12-3, LO12-4, LO12-5, LO1

Question

15 Required information The Foundational 15 [LO12-2, LO12-3, LO12-4, LO12-5, LO12-6)] The following information applies to the questions displayed below) Part 15 of 15 Cane Company manufactures two products called Alpha and Beta that sell for $150 and $110, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 108,000 units of each product. Its average cost per unit for each product at this level of activity are given below: 0.36 points Alpha Beta $30 15 Direct materials Direct labor Varlable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit 26 13 18 21 $130 24 14 16 $102 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 12-15 15. Assume that Cane's customers would buy a maximum of 86,000 units of Alpha and 66,000 units of Beta. Also assume that the company's raw material available for production is limited to 210,000 pounds. If Cane uses its 210,000 pounds of raw materials, up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)

Explanation / Answer

15) For determining the maximum price to be paid per pound of additional material, contribution margin per unit of raw material need to be calculated which is shown as follows:- (Amount in $)

Contribution margin per pound of Beta is higher than Alpha. Thus all the available material quantity is allocated for producing maximum demand of 66,000 units of Beta and remaining should be used for Alpha.

Total raw material required as per demand = (86,000 units*6 pounds)+(66,000 units*3 pounds) = 714,000 pounds

Raw material used for Beta = 66,000*3 = 198,000 pounds

remaining units for Alpha = 210,000-198,000 = 12,000 pounds

Additional units of raw material required for Alpha is 504,000 (714,000-210,000) for which the company will pay upto a maximum price of $10.50 (i.e. contribution margin per pound).

For calculating contribution margin fixed cost should not be considered whether it is traceable or not because its nature is fixed.

Particulars Alpha Beta Sale Price 150 110 Less: Variable costs Direct materials (a) (30) (15) Direct labour (26) (22) Variable manufacturing overhead (13) (11) Variable selling expenses (18) (14) Contribution margin (b) 63 48 Direct material cost per pound (c) 5 5 material required to make one unit (in pounds) (d = a/c) 6 3 Contribution margin per pound (b/d) 10.50 16

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