Question

Assume that Cane’s customers would buy a maximum of 94,000 units of Alpha and 74,000 units of Beta. Also assume that the company’s raw material available for production is limited to 228,000 pounds. If Cane uses its 228,000 pounds of raw materials, up to how much should it be willing to pay per pound for additional raw materials?

Cane Company manufactures two products called Alpha and Beta that sell for $190 and $155, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 122,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	40			$	24
Direct labor			34				28
Variable manufacturing overhead			21				19
Traceable fixed manufacturing overhead			29				32
Variable selling expenses			26				22
Common fixed expenses			29				24
Total cost per unit		$	179			$	149

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.

What contribution margin per pound of raw material is earned by each of the two products?

Assume that Cane’s customers would buy a maximum of 94,000 units of Alpha and 74,000 units of Beta. Also assume that the company’s raw material available for production is limited to 228,000 pounds. How many units of each product should Cane produce to maximize its profits?

Assume that Cane’s customers would buy a maximum of 94,000 units of Alpha and 74,000 units of Beta. Also assume that the company’s raw material available for production is limited to 228,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?

Answer 1

Part-1: Computation of Contribution per Pound require per Unit

Alpha

contribution margin:

190 - 40 - 34 - 21 - 26 = $69

pounds of raw material per unit:

$40/$8 per pound = 5 pounds

contribution margin per pound:

$69/5 pounds = $13.80 per pound

Beta

contribution margin:

155 - 24 - 28 - 19 -22 = $62

pounds of raw material per unit:

$24/$8 per pound = 3 pounds

contribution margin per pound:

$62/3 pounds = $20.67per pound

Part-2: Compuation of No. of Unit can be Produced
	Alpha	Beta
Contribution /Pound Raw Material	$13.80	$20.67
Rank	II	I
Max Unit	94000	74000
Pound require / Unit	5	3
Total Material Required	470000	222000
First Utilize for Beta		-222000
Further Remaining Utilize for Alpha (228000-222000)	6000
No of Unit can be produced ( Total Material Used / Pound per Unit)	1200	74000

3. Maximum Contribution Can be earn with Limited availablility of Raw Material =

= (1200X$69 + 74000*$62)=$4670800