Required information [The following information applies to the questions display

Question

Required information [The following information applies to the questions displayed below. 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: Direct materials Direct labor Variable manufacturing overhead Traceable fixed manufacturing overheacd Variable selling expenses Common fixed expenses $ 40 29 15 25 21 24 $154 $ 24 25 14 27 17 19 $126 Total cost per unit 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. 15. Assume that Cane's customers would buy a maximum of 89,000 units of Alpha and 69,000 units of Beta. Also assume that the company's raw material available for production is limited to 220,000 pounds. If Cane uses its 220,000 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.) imum to per

Explanation / Answer

Cane Company

Determination of the amount the company would be willing to pay per pound for additional raw materials:

Computation of the maximum price to be quoted per price for Alpha units:

Standard direct material cost per pound                                $8

Contribution margin per pound of direct materials               $12

Thus, the maximum price to be quoted for additional raw material for Alpha            $20

Therefore, Cane Company can pay a maximum of $20 per pound to procure additional raw material needed to meet the production and sales units of 89,000 for Alpha.

Workings:

Calculation of contribution margin for Alpha and Beta

Alpha

Beta

Selling price

$165

$130

Direct materials

$40

$24

Direct labor

$29

$25

Variable manufacturing overhead

$15

$14

variable selling expenses

$21

$17

Total variable cost

$105

$80

Contribution margin

$60

$50

Direct materials per unit

$40/$8

$24/$8

5 pounds

3 pounds

Contribution margin per pound

$60/5

$50/3

$12

$16.67

Ranking

II

I

Expected production

89,000 units

69,000 units

Since availability of raw materials is limited, the product with highest contribution margin per pound is first allotted the available raw materials.

Total available raw materials = 220,000 pounds

Hence, Beta’s raw material requirement is met first.

Beta’s material requirement = 3 pounds x 69,000 units = 207,000 pounds

Remaining raw material for Alpha = 13,000 pounds

Raw material required for Alpha = 89,000 units x 5 pounds = 445,000 pounds

Available raw materials = 13,000 pounds

Additional raw material to be purchased for Alpha = 445,000 – 13,000 = 432,000 pounds

Alpha

Beta

Selling price

$165

$130

Direct materials

$40

$24

Direct labor

$29

$25

Variable manufacturing overhead

$15

$14

variable selling expenses

$21

$17

Total variable cost

$105

$80

Contribution margin

$60

$50

Direct materials per unit

$40/$8

$24/$8

5 pounds

3 pounds

Contribution margin per pound

$60/5

$50/3

$12

$16.67

Ranking

II

I

Expected production

89,000 units

69,000 units

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