Question

Required information The following information applies to the questions displayed below.] Cane Company manufactures two products called Alpha and Beta that sell for $225 and $175, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 130,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha Beta 24 32 24 37 27 29 $173 $ 42 42 26 34 31 34 $209 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expense Common fixed expenses Total cost per unit 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. 15. Assume that Cane's customers would buy a maximum of 99,000 units of Alpha and 79,000 units of Beta. Also assume that the company's raw material available for production is limited to 344,000 pounds. If Cane uses its 344,000 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.) Maximum price to be paid per pound

Answer 1

Statement of Ranking:-

	Alpha	Beta
Sale Price pu	$225	$175
Variable cost pu	$175	$144
Contribution pu (a)	$50	$31
Direct Material (pound) pu (b)	($42/$6)=7 pound	($24/$6) =4 pound
Contribution per pound of Direct Material (a/b)	$7.14	$7.75
Ranking	2nd	1st

Variable Cost Per Unit = Direct Material + Direct Labour + Variable Mfr OH + Traceable fixed OH + Variable selling exp

Alpha = $42 + $42 + $26 + $34 + $31 = $175

Beta = $24 + $32 + $24 + $37 + $27 = $144

Products	Demand	DM required per unit	DM used	Units produced
Beta	79000	4 pound	(79000 * 4) =316000 pound	79000 units
Alpha	99000	7 pound	(344000 – 316000) =28000 pound	4000 Units

Beta got 1^st ranking, Hence we need to produce Beta first & then Alpha

Beta production should be equal to its demand

But Alpha Demands = 99000 & Production = 4000

We lost 95000 units sale of Alpha

We need extra pounds of Direct Materials to meet balance sales of Alpha

We lost contribution on Alpha

Contribution lost per pound of Direct Material = $7.14

Maximum price to be paid per pound = $6 + contribution lost per pound

    = $6 + $7.14 = $13.14

(6) If we discontinue Beta, we utilize Direct material to Alpha

Alpha Produce = (109000 * 4)/7 = 62285.7 or 62286

Contribution From Beta = 109000 * $31 = $3379000

Contribution from Alpha = 62286 * $50 = $3114300

Disadvantage = $3379000 - $3114300 = $264700