Question

Required information [The following information applies to the questions displayed below.) Cane Company manufactures two products called Alpha and Beta that sell for $205 and $164, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 127,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Beta Alpha $ 40 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit 32 194 $163 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.

12. What contribution margin per pound of raw material is earned by each of the two products?

Contribution margin per pound: Alpha Beta

13. Assume that Cane's customers would buy a maximum of 97,000 units of Alpha and 77,000 units of Beta. Also assume that the company's raw material available for production is limited to 247,000 pounds. How many units of each product should Cane produce to maximize its profits?

Units produced: Alpha Beta

14. Assume that Cane's customers would buy a maximum of 97,000 units of Alpha and 77,000 units of Beta. Also assume that the company's raw material available for production is limited to 247,000 pounds. What is the maximum contribution margin Came Company can earn given the limited quantity of raw materials?

Total contribution margin:

15. Assume that Cane's customers would buy a maximum of 97,000 units of Alpha and 77,000 units of Beta. Also assume that the company's raw material available for production is limited to 247,000 pounds. If Cane uses its 247,000 pounds of raw materials, up to how much should it be willing to pay per pound for additional raw materials?

Answer 1

Calculation of direct material required per unit
Product	Alpha	Beta
Material cost per unit	40.00	24.00
Material cost per pound	8.00	8.00
Direct material required per unit	5.00	3.00
Answer 12- Contribution margin per pound of material	Alpha	Beta
Selling price per unit	205.00	164.00
Direct Material per unit	40.00	24.00
Direct Labor cost per unit	37.00	30.00
Variable manufacturing overhead	24.00	22.00
Variable selling expense	29.00	25.00
Total Variable cost per unit	130.00	101.00
Contribution per unit ($)	75.00	63.00
Direct material required per unit	5.00	3.00
Contribution per pound of material ($)	15.00	21.00
Rank	2.00	1.00
For optimal utilization of material that product will be produced first whose contribution per pound of material is highest. So Beta will be produced first then remaining resources will be allocated to Alpha.
Answer 13
Material available		247,000.00
Demand for Beta	77,000.00		Beta has highest contribution per hour so it should be made first.
Material required for Beta		231,000.00
Material available		16,000.00
Direct material required per unit of Alpha		5.00
Number of units of Alpha		3,200.00
So,
Units produced: Beta	77,000.00
Units produced: Alpha	3,200.00
Answer 14
Contribution statement	Alpha	Beta	Total
Contribution per unit ($)	75.00	63.00
Number of units	3,200.00	77,000.00
Contribution ($)	240,000.00	4,851,000.00	5,091,000.00
So maximum contribution margin Cane Company can earn given the limited quantity of raw materials is $ 5,091,000.
Answer 15
The maximum additional material cost per pound hour may equal to extra contribution earned per hour and that is contribution per hour of Alpha.
Because the demand of Beta is already fulfilled by the existing material so additional material will be used only for production of Alpha.
So the maximum additional material cost per pound will be $ 15 which is the contribution per pound of Alpha.
So the highest additional labor cost to be $ 8 (original rate) + 15 ( contribution per pound of Alpha) i.e. $ 23.