Question

Required information [The following information applies to the questions displayed below.] Cane Company manufactures two products called Alpha and Beta that sell for $130 and $90, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 102,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha Beta Direct materials $ 25 $ 10 Direct labor 22 21 Variable manufacturing overhead 17 7 Traceable fixed manufacturing overhead 18 20 Variable selling expenses 14 10 Common fixed expenses 17 12 Total cost per unit $ 113 $ 80 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.

13. Assume that Cane’s customers would buy a maximum of 82,000 units of Alpha and 62,000 units of Beta. Also assume that the raw material available for production is limited to 162,000 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 82,000 units of Alpha and 62,000 units of Beta. Also assume that the raw material available for production is limited to 162,000 pounds. What total contribution margin will it earn?

15. Assume that Cane’s customers would buy a maximum of 82,000 units of Alpha and 62,000 units of Beta. Also assume that the raw material available for production is limited to 162,000 pounds. If Cane uses its 162,000 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

13)
	alpha	beta	Total
Selling price per unit	130	90
Total cost per unit	113	80
profit /unit (A)	17	10
Pounds RM/unit (a)	25/5=5	10/5=2
profit/pound (A/a)	3.4	5
Preference in production	II	I
Production (B)	7600	62000
Pounds RM used	38000	124000	162000	pounds
Maximum profits (A*B)	129200	620000	749200
14)
Selling price per unit	130	90
DM	25	10
DL	22	21
VMOH	17	7
VSE	14	10
Total Variable cost	78	48
Contribution per unit ('C)	52	42
Production     (D)	7600	62000
Total contribution margin (C*D)	395200	2604000	2999200
15)
Selling price per unit	130	90
DM	25	10
DL	22	21
VMOH	17	7
VSE	14	10
CFE	17	12
Unavoidable total cost	95	60
sacrifisable margin ('E)	35	30
RM pounds/unit (F)	5
sacrifised profit per pound (E/F)	7
Add: Current RM cost / pound	5
Willing to pay per additional RM pound	12
(because producing without profit covering FC)