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 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.

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?

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?

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 raw material available for production is limited to 160,000 pounds. What is the total contribution margin Cane Company will earn?

Answer 1

11.

Pounds of raw material required:

Alpha = $30/$6 = 5 pounds

Beta = $12/$6 = 2 pounds

12.

	Alpha	Beta
Selling price per unit	$120	$80
Less: Variable cost per unit
Direct material	30	12
Direct labor	20	15
Variable manufacturing overhead	7	5
Variable selling expenses	12	8
Contribution margin per unit	$51	$40
Pounds required per unit	5	2
Contribution margin per pound	$10.2	$20
Rank	2	1

13.

	Alpha	Beta
Maximum units	80,000	60,000
Pounds required per unit	5	2
Total pounds required	400,000	120,000
Pounds available	40,000 (160,000-120,000)	120,000
Units produced to maximize profit	8,000 (40,000/5)	60,000

14.

	Alpha	Beta	Total
Units produced to maximize profit	8,000	60,000
Contribution margin per pound	$10.2	$20
Total contribution margin	$81,600	$1,200,000	$1,281,600