Question

Cane Company manufactures two products called Alpha and Beta that sell for $210 and $172, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 128,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	40			$	24
Direct labor			38				34
Variable manufacturing overhead			25				23
Traceable fixed manufacturing overhead			33				36
Variable selling expenses			30				26
Common fixed expenses			33				28
Total cost per unit		$	199			$	171

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.

12. What contribution margin per pound of raw material is earned by each of the two products?

13. Assume that Cane’s customers would buy a maximum of 98,000 units of Alpha and 78,000 units of Beta. Also assume that the company’s raw material available for production is limited to 248,000 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 98,000 units of Alpha and 78,000 units of Beta. Also assume that the company’s raw material available for production is limited to 248,000 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 98,000 units of Alpha and 78,000 units of Beta. Also assume that the company’s raw material available for production is limited to 248,000 pounds. If Cane uses its 248,000 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

12	Contribution margin per pound of raw material:
					Alpha	Beta
	Selling price				210	172
	Less: Variable cost
	Direct materials				40	24
	Direct labor				38	34
	Variable manufacturing overhead				25	23
	Variable selling expenses				30	26
					133	107
	Contribution margin				77	65
	Pound of raw material required per unit
	(Note:1)				5	3
	Contribution margin per pound of raw material				15.4	21.7
	Note:1
	Pound of raw material required per unit:
					Alpha	Beta
	Direct materials			(a)	40	24
	Material cost per pound			(b)	8	8
	Pound of raw material required per unit
	(a)/(b)				5	3
13	Beta should be given priority since it has the larges contribution margin per pound
				Maximum Demand	Unit to be produced		Raw material used	Balance
	Raw material available							248000
	Beta			78000	78000	(78000*3)	234000	14000
	Alpha			98000	2800	(14000/5)	14000	0
	Units to be produced:
			Units
	Alpha		2800
	Beta		78000
14	Maximum contribution margin
	Product	Units to be produced	Contribution margin per unit	Total contribution
	Alpha	2800	77	215600
	Beta	78000	65	5070000
				5285600
15	Beta will be produced first
	Alpha will be prodeced then.So, additional raw material required for Alpha
	Maximum price willing to pay:
				$
	Direct material cost to Alpha			40
	Contribution margin per pound			15.4
	Maximum price			55.4