Question

Cane Company manufactures two products called Alpha and Beta that sell for $180 and $145, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 118,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	36			$	24
Direct labor			32				27
Variable manufacturing overhead			19				17
Traceable fixed manufacturing overhead			27				30
Variable selling expenses			24				20
Common fixed expenses			27				22
Total cost per unit		$	165			$	140

The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are deemed unavoidable and have been allocated to products based on sales dollars.

12. What contribution margin per pound of raw material is earned by Alpha and Beta? (Round your answers to 2 decimal places.)

13. Assume that Cane’s customers would buy a maximum of 92,000 units of Alpha and 72,000 units of Beta. Also assume that the company’s raw material available for production is limited to 300,000 pounds. How many units of each product should Cane produce to maximize its profits?

15. Assume that Cane’s customers would buy a maximum of 92,000 units of Alpha and 72,000 units of Beta. Also assume that the company’s raw material available for production is limited to 300,000 pounds. 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

Solution

Cane Company

Q12. Determination of the contribution margin per pound of raw material earned by Alpha and Beta:

Computations –

1. Pounds needed per unit of each product –

Cost per pound = $6

Pounds needed = direct material cost per unit/cost per pound

Alpha –

Pounds needed = $36/$6 = 6 pounds per unit

Beta –

Pounds needed = $24/$6 = 4 pounds

2. Contribution margin per pound = contribution margin per unit/pounds per unit

Alpha = $69/6 pounds = $11.50 per pound

Beta = $57/4 pounds = $14.25 per pound

Q13. Determination of number of units of each product that Cane should produce to maximize profits given limited availability of raw materials – 300,000 pounds:

The number of units of each product that Cane should produce is as follows,

Alpha – 2,000 units

Beta – 72,000 units

Computations –

Based on computations done in Q12, the contribution margin per pound of Beta is highest at $14.25 followed by Alpha at $11.50.

Hence, available raw materials are first allocated for the production of 72,000 units of Beta.

Direct materials needed for 72,000 units of Beta = 72,000 x 4 pounds = 288,000 pounds

Remaining pounds = 300,000 – 288,000 = 12,000 pounds

Number of units of Alpha that can be produced using the remaining 12,000 pounds = 12,000/6 = 2,000 units

Q15. Determination of the maximum price that Cane should be willing to pay per pound for additional raw materials:

The price that Cane should be willing to pay for additional raw materials = cost per pound + CM per pound of raw material for Alpha

(Since, the additional raw materials would be used for production of Alpha, the contribution margin per pound for Alpha is relevant)

The maximum price for additional raw materials –

Direct material cost per pound = $6

Add: contribution margin per pound for Alpha = $11.50

Maximum price for additional raw material = $17.50 per pound