Cane Company manufactures two products called Alpha and Beta that sell for $185

Question

Cane Company manufactures two products called Alpha and Beta that sell for $185 and $150, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 119,000 units of each product. Its average cost per unit 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 unavoidable and have been allocated to products based on sales dollars.

13. Assume that Cane’s customers would buy a maximum of 93,000 units of Alpha and 73,000 units of Beta. Also assume that the company’s raw material available for production is limited to 227,000 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 93,000 units of Alpha and 73,000 units of Beta. Also assume that the company’s raw material available for production is limited to 227,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?

15. Assume that Cane’s customers would buy a maximum of 93,000 units of Alpha and 73,000 units of Beta. Also assume that the company’s raw material available for production is limited to 227,000 pounds. If Cane uses its 227,000 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.)

Alpha Beta Direct materials $ 40 $ 24 Direct labor 33 28 Variable manufacturing overhead 20 18 Traceable fixed manufacturing overhead 28 31 Variable selling expenses 25 21 Common fixed expenses 28 23 Total cost per unit $ 174 $ 145

Explanation / Answer

Alpha Beta Direct material $ 40 24 Cost per pound $ 8 8 Pound of material used 5 3 Computation of contribution margin per pound: Alpha Beta Selling price 185 150 Less:variable costs Direct material 40 24 Direct labor 33 28 Variable manufacturing overhead 20 18 Variable selling expenses 25 21 Contribution per unit 118 91 Pound of material used 5 3 Contribution per pound 23.6 30.3 Rank 2 1 13 Total raw material available=227000 pounds To maximize profit produce as follows Units Pound used Material available 227000 Beta 73000 219000 8000 (73000*3) Alpha 1600 8000 0 (8000/5) 14 Alpha Beta Total Units produced 1600 73000 Contribution per unit 118 91 Contribution margin 188800 6643000 6831800 15 Maximum to pay for additional raw materials Alpha Direct material cost per pound 8 Contribution per pound 23.6 Maximum to pay for additional raw materials 31.6 No need to consider beta since its demand has already met.

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