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 average cost per unit 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 unavoidable and have been allocated to products based on sales dollars.

Foundational 12-12

What contribution margin per pound of raw material is earned by each of the two products? (Round your answers to 2 decimal places.)

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

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?

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. If Cane uses its 261,000 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.)

Answer 1

12.

	Alpha	Beta
Selling price	$           240.00	$              162.00
Direct material	$             35.00	$                15.00
Direct labor	$             48.00	$                23.00
Variable manufacturing overhead	$             27.00	$                25.00
Variable selling expenses	$             32.00	$                28.00
Contribution margin per unit	$             98.00	$                71.00
Material per unit (35/5, 15/5)	7 pounds	3 pounds
Contribution margin per pound	$             14.00	$                23.67

13.  

Product	Units
Beta	80000 units
Alpha	3000 units

Working:

Product	Rank	Units	Material required
Beta	1	80000	240000
Alpha	2	3000	21000
Total			261000

14.

Maximum Contribution Margin

$         59,74,000.00

Working:

Product	Rank	Units	Material required	Contribution Margin per unit	Total contribution margin
Beta	1	80000	240000	$ 71.00	$     56,80,000.00
Alpha	2	3000	21000	$ 98.00	$        2,94,000.00
Total			261000		$     59,74,000.00

15.

Maximum price to be paid per pound $	Alpha
Regular direct material cost per pound	$                  5.00
Contribution margin per pound of direct materials	$                14.00
Maximum price to be paid per pound	$                19.00

The company has satisfied all demand for Bets, it would use additional raw materials to produce Alpha.