Question

Cane Company manufactures two products called Alpha and Beta that sell for $155 and $115, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 110,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	24			$	12
Direct labor			23				26
Variable manufacturing overhead			22				12
Traceable fixed manufacturing overhead			23				25
Variable selling expenses			19				15
Common fixed expenses			22				17
Total cost per unit		$	133			$	107

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.

14. Assume that Cane’s customers would buy a maximum of 87,000 units of Alpha and 67,000 units of Beta. Also assume that the raw material available for production is limited to 168,000 pounds. What total contribution margin will it earn?

15. Assume that Cane’s customers would buy a maximum of 87,000 units of Alpha and 67,000 units of Beta. Also assume that the raw material available for production is limited to 168,000 pounds. If Cane uses its 168,000 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.)

Maximum price paid per pound:

Answer 1

Computation of contribution margin per pound

Particulars	Alpha	Beta
Selling price per unit	$155	$115
Less:Variable cost per unit:
Direct material	$24	$12
Direct labour	$23	$26
Variable manufacturing overhead	$22	$12
Variable selling expenses	$19	$15
Contribution margin per unit	$67	$50
Pounds of raw materials per unit(direct material/6)	$4 (24/6)	$2 (12/6)
Contribution margin per pound of material	$16.75 (67/4)	$25 (50/2)

As rawmaterial quantity is limited ,therefore rawnaterial will be utilised first for product providing higher contribution margin per pound. Therefore nos of units of each product to be made to maximise profit:

Beta =67000 units

Alpha = (168000-67000×2) /4 =8500 units

14)

Maximum contribution margin Cane company can earn given the limited quantity of raw materials = contribution margin from Alpha+contribution margin from Beta

=(8500×$67) +(67000×50)

=$569500+$3350000

=$3,919,500

15)

As current available material is sufficient to meet total demand of Beta product. Therefore extra material will be utilised in production of Alpha product .

Therefore maximum price that can company is willing to pay for additional pound of material = Regular price + contribution margin per pound of alpha

= $6+$16.75

=$22.75