Question

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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 average cost per unit for each product at this level of activity are given below:

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

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.

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 raw material available for production is limited to 160,000 pounds. How many units of each product should Cane produce to maximize its profits?

Answer 1

Ans: Computation of Contribution Margin Per Pound

Particulars	Alpha	Beta
Selling price per Unit	$120	$80
variable Cost per Unit:
Direct materials	$30	$12
Direct labor	$20	$15
Variable Manufacturing Overhead	$7	$5
Variable Selling Expenses	$12	$8
Contribution Margin Per Unit {Sales-Variable Expenses}	$51	$40
Raw materials Required per Unit {Direct materials/Cost per unit}	5	2
Contribution Margin Per pound of Materials	$10.20	$20

Since contribution Margin per Pound of Direct Materials is higher of Beta, therefore It will be ranked as first

and raw materials is limited and by the above computation it can be said that contribution margin is highest of alpha therefore number of units to maximize profit will be

Alpha= 160,000-60,000*2}/5

=> 8,000 Units