Question

Cane Company manufactures two products called Alpha and Beta that sell for $215 and $160, respectively. Each product uses only one type of raw material that costs $7 per pound. The company has the capacity to annually produce 125,000 units of each product. Its unit costs for each product at this level of activity are given below:

	Alpha				Beta
Direct materials		$	42			$	21
Direct labor			35				28
Variable manufacturing overhead			23				21
Traceable fixed manufacturing overhead			31				34
Variable selling expenses			28				24
Common fixed expenses			31				26
Total cost per unit		$	190			$	154

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.

10.

Assume that Cane expects to produce and sell 71,000 Alphas during the current year. A supplier has offered to manufacture and deliver 71,000 Alphas to Cane for a price of $144 per unit. If Cane buys 71,000 units from the supplier instead of making those units, how much will profits increase or decrease?

        

15.

Assume that Cane’s customers would buy a maximum of 96,000 units of Alpha and 76,000 units of Beta. Also assume that the company’s raw material available for production is limited to 246,000 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

Answer 10.
Statement of Incremental Profit (Loss)
If Supplier Offer is Accepted - Alpha - 71,000 Units
		Amount
Incremental Revenue
Savings in Costs - Alpha
Direct Materials - 71,000 Units X 42	2,982,000
Direct Labor - 71,000 Units X $35	2,485,000
Variable MOH - 71,000 Units X $23	1,633,000
Traceable Fixed MOH -Alpha - 125,000 Units X $31	3,875,000	10,975,000
Incremental Cost
Purchase Cost - 71,000 Units X $144		10,224,000
Net Incremental Profit (Loss)		751,000
Answer 15.
	Alpha	Beta
Direct Materials	42.00	21.00
Direct Labor	35.00	28.00
Variable MOH	23.00	21.00
Traceable Fixed MOH	40.36	55.92
Variable Selling Expenses	28.00	24.00
Total Costs	168.36	149.92
SP Per Unit	215.00	160.00
Profit Per Unit	46.64	10.08
Material in Pounds Required to produce I Unit	6.00	3.00
Profit per Pound	7.77	3.36
Common fixed expenses are unavoidable and hence are sunk costs and will not be considered in decision making
Total traceable Fixed MOH for Alpha = $31 X 125,000 Units = $3,875,000
Maximum Units can be Sold for Alpha = 96,000 Units
Traceable Fixed MOH for Alpha per Unit = $3,875,000/96,000 Units = $40.36 per Unit
Total traceable Fixed MOH for Beta = $34 X 125,000 Units = $4,250,000
Maximum Units can be Sold for Beta = 76,000 Units
Traceable Fixed MOH for BetaAlpha per Unit = $4,250,000/76,000 Units = $55.92 per Unit
Total Material in Pounds Required to produce
Alpha - 96,000 Units X 6 pounds	576,000.00
Beta - 76,000 Units X 3 Pounds	228,000.00
Total Material in Pounds	804,000.00
Raw Material AVAILABLE	246,000.00
Raw Material Shortage	558,000.00
Since Profit per pound is of alpha is higher, so we will produce first Alpha from the Available Raw Material
So, Raw Material Required,
Alpha
Material Required	576,000.00
Material Available	246,000.00
Shortage of raw Material for Alpha	330,000.00
In Units = 330,000/6 Pounds = 55,000 Units
Maximum Price per pound to be Paid for Alpha = $7.77 (Profit per Pound) + $7 (price per Pound) = $13.65 per pound
Maximum Price per pound to be Paid for Beta = $3.36 (Profit per Pound) + $7 (price per Pound) = $10.36 per pound