Question

Cane Company manufactures two products called Alpha and Beta that sell for $130 and $90, respectively. Each product uses only one type of raw materlal that costs $5 per pound. The company has the capacity to annually produce 102,000 units of each product. Its average cost per unit for each product at this level of activity are given below:

Alpha Beta
Direct materials $25 $10
Direct labor 22 21
Variable manufacturing overhead 17 7
Traceable fixed manufacturing overhead 18 20
Variable selling expenses 14 10
Common fixed expenses 17 12
Total cost per unit $113 $80


The company considers its traceable fixed manufacturing overhead to be avoldable, whereas its common fixed expenses are unavoldable and have been allocated to products based on sales dollars.

a. Assume that Cane expects to produce and sell 52,000 Alphas during the current year. A supplier has offered to manufacture and deliver 52,000 Alphas to Cane for a price of $88 per unit. What is the financial advantage (disadvantage) of buying 52,000 units from the supplier instead of making those units?
b. Assume that Cane's customers would buy a maximum of 82,000 units of Alpha and 62,000 units of Beta. Also assume that the raw material available for production is limited to 162,000 pounds. How many units of each product should Cane produce to maximize its profits? Units produced for Alpha? Units produced for Beta?
c. Assume that Cane's customers would buy a maximum of 82,000 units of Alpha and 62,000 units of Beta. Also assume that the raw material available for production is limited to 162,000 pounds. What total contribution margin will it earn?
d. Assume that Cane's customers would buy a maximum of 82,000 units of Alpha and 62,000 units of Beta. Also assume that the raw material available for production is limited to 162,000 pounds. If Cane uses its 162,000 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.)

Answer 1

Step-by-step explanation:

a. Raw material needed to make one unit

Alpha = 25/5 = 5 Pound

beta = 10/5 = 2 Pound

b. Contribution margin per pound

Alpha Beta

Selling price 130 90

Direct material 25 10

Direct labor 22 21

Variable manufacturing overhead 17 7

Variable selling expenses 14 10

Contribution margin per unit 52 42

pound per unit 5 2

Contribution pound per pound 10.4 21

c. product mix

Pound Unit

Beta 62000*2 = 124000 62000

Alpha 38000 38000/5 = 7600

Total 162000

d. Maximum contribution margin = (62000*42+7600*52) = $2999200

e. Highest price = 10.4+5 = 15.40 per pound