Question

Cane Company manufactures two products called Alpha and Beta that sell for $165 and $130, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 113,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha $ 40 Beta $ 24 25 14 15 Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit 17 24 $154 $126 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? (Round your answers to 2 decimal places.) Alpha Beta Contribution margin per pound

Answer 1

Contribution margin per unit = Selling price per unit - Direct materials per unit - Direct labor per unit - Variable manufacturing overhead per unit - Variable selling expenses per unit

Alpha = $165 - $40 - $29 - $15 - $21 = $60

Beta = $130 - $24 - $25 - $14 - $17 = $50

12. Number of pounds required per unit = Direct materials / $8

Alpha = $40 / $8 = 5

Beta = $24 / $8 = 3

Contribution margin per pound = Contribution margin / Number of pounds

	Alpha	Beta
Contribution margin per pound	$12 ($60/5)	$16.67 ($50/3)

13. Beta is produced first as it gives more contribution margin per unit.

	Alpha	Beta
Units produced	2,600 [{220,000-(69,000*3)} / 5]	69,000

14. Total contribution margin = Alpha + Beta

= (2,600 * $60) + (69,000 * $50)

= $3,606,000

10. Relevant costs per unit to produce = Direct materials per unit + Direct labor per unit + Variable manufacturing overhead per unit + Traceable fixed manufacturing overhead per unit

= $40 + $29 + $15 + $25

= $109

Financial disadvantage = ($116 - $109) * 59,000

= $413,000