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 unit costs 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 deemed unavoidable and have been allocated to products based on sales dollars. Required: 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? What is the Total Contribution Margin? $

Answer 1

Computation of Contribution margin per Unit
	Alpha	Beta
Selling price per unit	$125	$85
Less: Variable costs
Direct materials	$30	$12
Direct labor	$21	$20
Variable manufacturing overhead	$8	$6
Variable selling expenses	$13	$9
Total variable expenses	$72	$47
Unit contribution margin	$53	$38
Raw Material Required per Unit (30/6), (12/6)	5	2
Contribution per Pound of Raw material	$10.60	$19.00
Rank	II	I

Allocation of Raw Material & identification of sales mix
Raw material Available	161000
Raw material Used for Beta	122000
( 61000 Unit X 2)
Balance Raw material	39000
No. of Unit Alpha can be Produced ( 39000/5)	7800

Computation of Maximum and total contribution can be earned with limited resources
	Alpha	Beta	Total
Allocation of Raw Material ( Pound)	39000	122000	161000
Contribution per Pound	$10.60	$19.00
Maximum Contribution can be earned	$4,13,400.00	$23,18,000.00	$27,31,400.00