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 unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	30			$	12
Direct labour			20				15
Variable manufacturing overhead			7				5
Traceable fixed manufacturing overhead			16				18
Variable selling expenses			12				8
Common fixed expenses			15				10
Cost per unit		$	100			$	68

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.

11. How many pounds of raw material are needed to make one unit of Alpha and one unit of Beta?

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 80,000 units of Alpha and 60,000 units of Beta. Also assume that the company’s 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 company’s raw material available for production is limited to 160,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?

15. 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 company’s raw material available for production is limited to 160,000 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 all the question

Answer 1

11 Each pound of raw materials cost = $6

Alpha consume raw materials cost $30 and Beta consume raw materials cost $12

Therefore the pounds of raw materials consumed by each products

Alpha = 30 / 6 = 5 pounds

Beta = 12 / 6 = 2 pounds

5 pounds of raw materials needed to produce one unit of Alpha and 2 pounds of raw materials needed to produce one unit of Beta.

12 Contribution margin per unit = selling price - variable cost

Contribution margin per unit of Alpha

= 120 - (30 + 20 + 7 + 12) = $51

Contribution margin per pound of raw material of Alpha

= 51 / 5 = $10.2 per pound

Contribution margin per unit of Beta

= 80 - (12 + 15 + 5 + 8) = $40

Contribution margin per pound of raw material of Beta

= 40 / 2 = 20 per pound

Alpha has a contribution margin per raw material of $10.2 and Beta has contribution margin per raw materials of $20.

13 Maximize profit

The company produce first because, Beta has the highest contribution margin per pound of raw materials.

The raw materials is available for production is limited to only 160,000 pounds.

Each units of Beta require 2 pounds of raw materials

Raw materials required to produce 60,000 units of Beta

= 60,000 × 2 = 120,000 pounds

120,000 pounds raw materials required for producing 60,000 units of Beta

Raw materials available after producing Beta

= 160,000 - 120,000 = 40,000 pounds

Each unit of Alpha requires 5 pounds of raw materials

Unit of Alpha can be produced with 40,000 pounds of raw materials

= 40,000 / 5 = 8,000 units

8,000 units of Alpha can be produced with 40,000 pounds of raw materials.

So We can produce 60,000 units of Beta and 8,000 units of Alpha.

14 60,000 units of Beta and 8,000 units of Alpha are produced with 160,000 pounds of raw materials.

Each unit of Beta gives contribution margin per unit of $40 and each unit of Alpha gives contribution margin per unit of $51.

Contribution margin from 60,000 units of Beta

= 60,000 × 40 = $2,400,000

Contribution margin from 8,000 units Alpha

= 8,000 × 51 = $408,000

Total contribution margin from Beta and Alpha

= 2,400,000 + 408,000 = $2,808,000

$2,808,000 total contribution margin can earn by Cane company from 60,000 units of Beta and 8,000 units of Alpha.

15 The Cane company can met its customer Demand of 60,000 units of Beta from 120,000 pounds of raw materials and the company can produce 8,000 units of Alpha from balance 40,000 pounds of raw materials out of total 160,000 pounds of raw materials.

So the Cane company need additional pounds of raw materials to meet the demand of its customer for Alpha.

Each unit of Alpha give a contribution margin of $51.

$51 is willing to pay by Cane company to buy each additional unit of raw materials.

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