Question

Cane Company manufactures two products called Alpha and Beta that sell for $240 and $162, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 131,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	35			$	15
Direct labor			48				23
Variable manufacturing overhead			27				25
Traceable fixed manufacturing overhead			35				38
Variable selling expenses			32				28
Common fixed expenses			35				30
Total cost per unit		$	212			$	159

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. 13. Assume that Cane’s customers would buy a maximum of 100,000 units of Alpha and 80,000 units of Beta. Also assume that the company’s raw material available for production is limited to 261,000 pounds. How many units of each product should Cane produce to maximize its profits? Units produced:   Alpha:________________   Beta:________________            14. Assume that Cane’s customers would buy a maximum of 100,000 units of Alpha and 80,000 units of Beta. Also assume that the company’s raw material available for production is limited to 261,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials? Total Contribution Margin: ________________ 15. Assume that Cane’s customers would buy a maximum of 100,000 units of Alpha and 80,000 units of Beta. Also assume that the company’s raw material available for production is limited to 261,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.) Maximum price to be paid per pound: _________________

Answer 1

13. BETA 80,000 and ALPHA 3000

Remaining pounds for Beta = total pounds of raw materials - 1 raw materials pounds used by beta = 261000 - (80000*3)= 21000

The company should produce Beta first because it earns the highest contribution margin per pound of raw materials. After customer demand for Beta has been satisfied by producing 80,000 units, there are (261000-(80000*3))=21,000pounds of raw materials remaining to use for making Alphas. Since each Alpha requires 7 pounds of rawmaterials, the company would be able to produce 3,000 Alphas (21,000 pounds ÷ 7 pounds per unit) beforerunning out of raw materials.

14. Contribution margin = number units * contribution margin Per unit

Alpha = 3000*98=294000

Beta =80000*71=5680000

Total = 5974000

15. Maximum price to be paid per pound: $19.00

Alpha

Regular direct material cost per pound $5.00 Contributionmargin perpound of directmaterials 14

Maximum priceto be paid per pound $19

Because the company has satisfied all demand for Betas, it would use additional raw materials to produce Alphas.