Cane Company manufactures two products called Alpha and Beta that sell for $120
ID: 2474894 • Letter: C
Question
Cane Company manufactures two products called Alpha and Beta that sell for $120 and $80, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 100,000 units of each product. Its unit costs for each product at this level of activity are given below:
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.
13. Assume that Cane’s customers would buy a maximum of 80,000 units of Alpha and 60,000 units of Beta. Also assume that the company’s raw material available for production is limited to 160,000 pounds. How many units of each product should Cane produce to maximize its profits?
14. Assume that Cane’s customers would buy a maximum of 80,000 units of Alpha and 60,000 units of Beta. Also assume that the company’s raw material available for production is limited to 160,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?
15. Assume that Cane’s customers would buy a maximum of 80,000 units of Alpha and 60,000 units of Beta. Also assume that the company’s raw material available for production is limited to 160,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)
[The following information applies to the questions displayed below.]
Explanation / Answer
Variable cost and contribution:
13) To maximise the profit for raw-material availability of 160,000 pounds, the production schedule should be:
Beta (with maximum unit contribution) = 60000 units of production * 2 = 120000 pounds
Alpha = (160000 - 120000) / 5 = 8000 units of production
so, Production units are Alpha = 8000 units and Beta = 60000 units
14) Maximum contribution = Beta = 60000 * 40 = $2,400,000
Alpha = 8000 * 51 = $ 408,000
Total Contribution = $2,808,000
15) The company should be willing to pay more per pound of additional raw-material = $10.2 per pound, i.e equivalent to the per pound contribution of alpha product.
Alpha Beta Direct Material 30 12 Direct Labor 20 15 Variable Manufacturing Overhead 7 5 Variable Selling Expenses 12 8 Total Variable costs 69 40 Selling Price 120 80 Contribution $51 $40 Pounds of Raw Material consumed per unit 30/6=5 pounds 12/6=2 pounds Contribution per Pounds of Raw Material $10.5 / pound $20 / pound