Question

Cane Company manufactures two products called Alpha and Beta that sell for $155 and $115, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 110,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	24			$	12
Direct labor			23				26
Variable manufacturing overhead			22				12
Traceable fixed manufacturing overhead			23				25
Variable selling expenses			19				15
Common fixed expenses			22				17
Total cost per unit		$	133			$	107

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 87,000 units of Alpha and 67,000 units of Beta. Also assume that the company’s raw material available for production is limited to 168,000 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 87,000 units of Alpha and 67,000 units of Beta. Also assume that the company’s raw material available for production is limited to 168,000 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 87,000 units of Alpha and 67,000 units of Beta. Also assume that the company’s raw material available for production is limited to 168,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)

Answer 1

11.Direct Material Units required per unit = Direct Material Cost per Unit/Cost of one pound of Direct Material

Alpha = 24/6 = 4 pounds

Beta = 12/6 = 2 pounds

12. Calculation of contribution margin per pound

	Alpha	Beta
Selling price per unit	155	115
Direct materials	24	12
Direct labor	23	26
Variable manufacturing overhead	22	12
Variable selling expenses	19	15
Contribution Margin per unit (A)	67	50
Pounds of raw material per unit (B)	4	2
Contribution Margin per pound (A/B)	$16.75	$25

13.Since raw material is the limiting factor, priority should be given to the product which provides maximum contribution margin per unit of direct material

Product	Units	Raw Material Per unit	Total raw Material
Alpha	8,500	4	34,000
Beta	67,000	2	134,000
		Total	168,000

Hence, cane should produce 8,500 units of Alpha and 67,000 units of beta to maximise profits.

14.Maximum contribution margin = 8,500*67 + 67,000*50

= $3,919,500

15.Additional pound of raw material would be used in the production of Alpha (since already met demand of beta)

Maximum Amount per pound = Cost per pound + contribution margin per pound

= $6 + $16.75

= $22.75