Question

Cane Company manufactures two products called Alpha and Beta that sell for $190 and $155, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 122,000 units of each product. Its unit costs for each product at this level of activity are given below:

    Alpha   Beta
Direct materials      $   40         $   24     
Direct labor         34            28     
Variable manufacturing overhead         21            19     
Traceable fixed manufacturing overhead         29            32     
Variable selling expenses         26            22     
Common fixed expenses         29            24     
Total cost per unit      $   179         $   149     

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 94,000 units of Alpha and 74,000 units of Beta. Also assume that the company’s raw material available for production is limited to 228,000 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 94,000 units of Alpha and 74,000 units of Beta. Also, assume that the company’s raw material available for production is limited to 228,000 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 94,000 units of Alpha and 74,000 units of Beta. Also assume that the company’s raw material available for production is limited to 228,000 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 1

11) Pounds of raw material needed to make one unit

	Alpha	Beta
Pounds of raw material needed	40/8 = 5	24/8 = 3

12) Contribution margin per pound

	Alpha	Beta
Contribution margin per unit	69	62
Pound per unit	5	3
Contribution margin per pound	13.8	20.67

13) Optimum mix

	Pound	Unit
Beta	74000*3 = 222000	74000
Alpha	6000	6000/5 = 1200
Total	228000

14) Maximum contribution margin = 1200*69+74000*62 = $4670800

15) Highest price = 13.8+8 = 21.80 per pound