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 material that costs $5 per pound. The company has the capacity to annually produce 102,000 units of each product. Its unit costs 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 avoidable, whereas its common fixed expenses are deemed unavoidable and have been allocated to products based on sales dollars.
1. Assume that Cane expects to produce and sell 82,000 Alphas during the current year. A supplier has offered to manufacture and deliver 82,000 Alphas to Cane for a price of $88 per unit. If Cane buys 82,000 units from the supplier instead of making those units, how much will profits increase or decrease?
2. 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. If Cane buys 52,000 units from the supplier instead of making those units, how much will profits increase or decrease?
3. How many pounds of raw material are needed to make one unit of Alpha and one unit of Beta?
4. What contribution margin per pound of raw material is earned by Alpha and Beta? (Round your answers to 2 decimal places.)
5. 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 company's raw material available for production is limited to 162,000 pounds. How many units of each product should Cane produce to maximize its profits?
6. 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 company's raw material available for production is limited to 162,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?
7. 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 company's raw material available for production is limited to 162,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)