Question

In: Accounting

Cane Company manufactures two products called Alpha and Beta that sell for $210 and $172, respectively....

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.)

Solutions

Expert Solution

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

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