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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:
|
|
Alpha |
Beta |
| Direct materials |
|
$ |
30 |
|
|
$ |
12 |
|
| Direct labor |
|
|
20 |
|
|
|
15 |
|
| Variable manufacturing overhead |
|
|
7 |
|
|
|
5 |
|
| Traceable fixed manufacturing overhead |
|
|
16 |
|
|
|
18 |
|
| Variable selling expenses |
|
|
12 |
|
|
|
8 |
|
| Common fixed expenses |
|
|
15 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
| Total cost per unit |
|
$ |
100 |
|
|
$ |
68 |
|
|
|
|
|
|
|
|
|
|
|
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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.
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1.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?
2.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?