Question

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.

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 80,000 units of Alpha and 60,000 units of Beta. Also assume that the raw material available for production is limited to 160,000 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 80,000 units of Alpha and 60,000 units of Beta. Also assume that the raw material available for production is limited to 160,000 pounds. What total contribution margin will it earn?

Answer 1

12	Contribution Margin per pound of raw material earned
		Alpha	Beta
	Selling Price per Unit	120	80
	Less: Variable Cost :
	Direct Material	30	12
	Direct Labor	20	15
	Variable Manufacturing Overhead	7	5
	Variable Selling Expense	12	8
	Total Variable Cost per Unit	69	40
	Contribution Margin per Unit (A)	51	40
	Pound of Direct Material required for one Unit :
	Direct Material	30	12
	Cost per pound of Direct Material	6	6
	Pound of Direct Material per Unit (B)	5	2
	Contribution Margin per pound of raw material (A/B)	10.2	20
13	Products	Pound Per Unit	Production Unit	Total Pound
	Beta	2	60,000	1,20,000
	Alpha	5	8,000	40,000
	Total			1,60,000
	Working:
	Having more contribution per unit on Raw Material is for Beta. So Beta produce first.After Beta satisfied, remaining is for Alpha.
	Raw Material Production Limit	1,60,000
	Less: Beta (60,000*2)	1,20,000
	Balance for Alpha (40,000/5)	8,000 Unit
14	Total Contribution Margin earn	Alpha	Beta
	Number of Unit Produced (A)	8,000	60,000
	Contribution Margin per Unit (B)	51	40
	Contribution Margin per Product (A*B)	4,08,000	24,00,000
	Total Contribution Margin	28,08,000