Cane Company manufactures two products called Alpha and Beta that sell for $205
ID: 2467063 • Letter: C
Question
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 unit costs for each product at this level of activity are given below:
Alpha Beta
Direct materials $ 40 $ 24
Direct labor 37 30
manufacturing overhead 24 22
Traceable fixed manufacturing overhead 32 35
Variable selling expenses 29 25
Common fixed expenses 32 27
Total cost per unit $ 194 $ 163
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.
Required:
1. Assume that Cane expects to produce and sell 72,000 Alphas during the current year. A supplier has offered to manufacture and deliver 72,000 Alphas to Cane for a price of $148 per unit. If Cane buys 72,000 units from the supplier instead of making those units, how much will profits increase or decrease?
2. What contribution margin per pound of raw material is earned by Alpha and Beta?
Explanation / Answer
= ( 32 x 127,000 ) + $ 3,429,000
= $ 4,064,000 + $ 3,429,000
= $ 7,493,000
Variable Cost to manufacture Alpha
Direct Material $ 40
Direct Labor $ 37
Manufacturing Overhead $ 24
Variable Selling Expenses $ 29
Total Variable Cost $ 130
Buying from supplier is expensive (148 – 130) by 18 = 18 x 72,000 = $ 1,296,000 i.e. (profit decreases)
2. Contribution Margin per pound of Raw Material
Particulars Alpha Beta
A= Sales Price $ 205 $ 164
-Less Variable Cost
Direct Material $ 40 $ 24
Material Variable Overhead $ 24 $ 22
Variable Sales Expenses $ 29 $ 25
Total Variable Cost $ 130 $ 101
B= Contribution Margin per Unit (=Sales-VC) $ 75 $ 63
C= Raw material per pound $ 8 $ 8
D=A/C= No. of pounds of raw material $ 5 $ 3
E=B/D=Contribution margin per pound of raw material $ 15 $ 21
Contribution margin per pound of raw material is earned by Alpha is $ 15 and Beta is $ 21.