Question

Cane Company manufactures two products called Alpha and Beta that sell for $130 and $90, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 102,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	25			$	10
Direct labor			22				21
Variable manufacturing overhead			17				7
Traceable fixed manufacturing overhead			18				20
Variable selling expenses			14				10
Common fixed expenses			17				12
Total cost per unit		$	113			$	80

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.

11. How many pounds of raw material are needed to make one unit of each of the two products?

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 82,000 units of Alpha and 62,000 units of Beta. Also assume that the company’s raw material available for production is limited to 162,000 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 82,000 units of Alpha and 62,000 units of Beta. Also assume that the company’s raw material available for production is limited to 162,000 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 82,000 units of Alpha and 62,000 units of Beta. Also assume that the company’s raw material available for production is limited to 162,000 pounds. If Cane uses its 162,000 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

11) Raw material needed to make one unit

Alpha = 25/5 = 5 Pound

beta = 10/5 = 2 Pound

12) Contribution margin per pound

	Alpha	Beta
Selling price	130	90
Direct material	25	10
Direct labor	22	21
Variable manufacturing overhead	17	7
Variable selling expenses	14	10
Contribution margin per unit	52	42
pound per unit	5	2
Contribution pound per pound	10.4	21

13)product mix

	Pound	Unit
Beta	62000*2 = 124000	62000
Alpha	38000	38000/5 = 7600
Total	162000

14) Maximum contribution margin = (62000*42+7600*52) = $2999200

15) Highest price = 10.4+5 = 15.40 per pound