Question

Cane Company manufactures two products called Alpha and Beta that sell for $150 and $105, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 107,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	30			$	10
Direct labor			25				20
Variable manufacturing overhead			12				10
Traceable fixed manufacturing overhead			21				23
Variable selling expenses			17				13
Common fixed expenses			20				15
Total cost per unit		$	125			$	91

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.

6. Assume that Cane normally produces and sells 95,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

13. Assume that Cane’s customers would buy a maximum of 85,000 units of Alpha and 65,000 units of Beta. Also assume that the company’s raw material available for production is limited to 166,000 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 85,000 units of Alpha and 65,000 units of Beta. Also assume that the company’s raw material available for production is limited to 166,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?

5. Assume that Cane’s customers would buy a maximum of 85,000 units of Alpha and 65,000 units of Beta. Also assume that the company’s raw material available for production is limited to 166,000 pounds. If Cane uses its 166,000 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.)

Answer 1

Calculation of Contribution Margin per Unit:

	Alpha	Beta
Selling price	150	105
Direct Material	30	10
Direct Labor	25	20
Variable Manufacturing Overhead	12	10
Variable Selling Expenses	17	13
Contribution Margin per Unit	66	52
Pounds of Raw material per unit = Cost of direct material/5	6	2
Contribution per pound of raw material	11	26

Avoidable fixed costs are:

Alpha = 107,000*21 = $2,247,000

Beta = 107,000*23 = $2,461,000

6.Financial Advantage/(Disadvantage) of discontinuing Beta product line = Fixed Costs Saved – Contribution Lost

= 2,461,000 – 95,000*52

= $(2,479,000)

i.e. disadvantage

13.Since contribution per pound of raw material is higher for Beta, the company should produce Beta first and Alpha from the remaining raw material.

Beta Produced = 65,000 units, Raw material consumed = 130,000 pounds

Alpha = 6,000 units

14. Maximum Contribution will be 6,000*66 + 65,000*52

= $396,000+$3,380,000

= $3,776,000

5. Since Beta has been produced upto maximum demand, additional raw material will be used in the production of Alpha,

Maximum price per pound of raw material = Cost per Pound + Contribution Margin per pound

=$5+$11

= $16