14. Assume that Cane’s customers would buy a maximum of 94,000 units of Alpha an

ID: 2535860 • Letter: 1

Question

14. Assume that Cane’s customers would buy a maximum of 94,000 units of Alpha and 74,000 units of Beta. Also assume that the company’s raw material available for production is limited to 228,000 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 94,000 units of Alpha and 74,000 units of Beta. Also assume that the company’s raw material available for production is limited to 228,000 pounds. If Cane uses its 228,000 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.)

Cane Company manufactures two products called Alpha and Beta that sell for $190 and $155, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 122,000 units of each product. Its average cost per unit for each product at this level of activity are given below Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overhead Variable selling expenses Common fixed expenses Total cost per unit $ 40 34 21 29 26 29 $179 Alpha Beta S 24 28 19 32 24 $149 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.

Explanation / Answer

Cane Company

14. Maximum buy units of alpha - 94,000; beta – 74,000

Limited availability of raw material = 228,000 pounds

Determination of maximum contribution margin Cane can earn given the limited quantity of raw materials:

The total contribution margin with raw materials as constraint, = $4,670,800

Computations:

Computation of contribution margin per unit, pounds per unit and contribution margin per pound:

Alpha

Beta

Selling price per unit

$190

$155

Variable costs:

Direct materials

$40

$24

Direct labor

$34

$28

Variable manufacturing overhead

$21

$19

Variable selling expenses

$26

$22

Total variable cost

$121

$93

unit contribution margin

$69

$62

cost of raw material per pound

raw materials requirements in pounds

40/8 = 5

24/8 =3

contribution margin per pound

$13.80

$20.67

Ranking

Since beta earns higher contribution margin per pound, the available raw materials are first used to produce maximum units of Beta.

Maximum units = 74,000

Raw materials needed = 74,000 x3 pounds = 222,000 pounds

Remaining raw materials available for Alpha = 228,000 – 222,000 = 6,000 pounds

Number of units of Alpha that can be produced using the remaining raw materials = 6,000/5 = 1,200unit

Hence the maximum contribution at this product mix of Alpha – Beta : 1,200 : 74,000

Contribution margin –

Alpha – 1,200 units x $69 = $82,800

Beta – 74,000 units x $62 = $4,588,000

Total contribution margin $4,670,800

Since Beta is being allocated adequate raw materials to satisfy its maximum demand, we compute the amount that can be paid per pound for additional raw materials for Alpha –

Cost of raw material per pound = $8

Contribution margin per pound of Alpha = $13.80

Maximum price that can be paid per additional pound of raw material = $21.80