Question

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Cane Company manufactures two products called Alpha and Beta that sell for $185 and $150, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 119,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	40			$	24
Direct labor			33				28
Variable manufacturing overhead			20				18
Traceable fixed manufacturing overhead			28				31
Variable selling expenses			25				21
Common fixed expenses			28				23
Total cost per unit		$	174			$	145

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? (Alpha/Beta)

12. What contribution margin per pound of raw material is earned by each of the two products? (Round your answers to 2 decimal places.) (Alpha/Beta)

13. Assume that Cane’s customers would buy a maximum of 93,000 units of Alpha and 73,000 units of Beta. Also assume that the raw material available for production is limited to 227,000 pounds. How many units of each product should Cane produce to maximize its profits? (Alpha/Beta)

14. Assume that Cane’s customers would buy a maximum of 93,000 units of Alpha and 73,000 units of Beta. Also assume that the raw material available for production is limited to 227,000 pounds. What total contribution margin will it earn?

15. Assume that Cane’s customers would buy a maximum of 93,000 units of Alpha and 73,000 units of Beta. Also assume that the raw material available for production is limited to 227,000 pounds. If Cane uses its 227,000 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) Pound needed for one unit

	Alpha	beta
Pound needed for per unit	40/8 = 5	24/8 = 3

12) Contribution margin per pound

	Alpha	Beta
Selling price	185	150
Direct material	40	24
Direct labor	33	28
Variable manufacturing overhead	20	18
Variable selling expenses	25	21
Contribution margin per unit	67	59
Pound per unit	5	3
Contribution margin per pound	13.4	19.67

13) Optimum mix

	Hour	Unit
Beta	73000*3 = 219000	73000
Alpha	8000	8000/5 = 1600
Total	227000

14) Maximum contribution margin = (73000*59+1600*67) = $4414200

15) Highest price = 13.40+8 = 21.40