Question

2-15

Cane Company manufactures two products called Alpha and Beta that sell for $120 and $80, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 100,000 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			$	12
Direct labor			20				15
Variable manufacturing overhead			7				5
Traceable fixed manufacturing overhead			16				18
Variable selling expenses			12				8
Common fixed expenses			15				10
Total cost per unit		$	100			$	68

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.

1. Assume that Cane’s customers would buy a maximum of 80,000 units of Alpha and 60,000 units of Beta. Also assume that the company’s raw material available for production is limited to 160,000 pounds. If Cane uses its 160,000 pounds of raw materials, up to how much should it be willing to pay per pound for additional raw materials?

2. What is the company’s total amount of common fixed expenses?

Answer 1