Question

Required information

The Foundational 15 [LO11-2, LO11-3, LO11-4, LO11-5, LO11-6]

[The following information applies to the questions displayed below.]

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 average cost per unit 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

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.

Foundational 11-15

15. 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 raw material available for production is limited to 160,000 pounds. If Cane uses its 160,000 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.)

Question: Maximum price to be paid per pound?

Answer 1

Contribution margin per pound

	Alpha	Beta
Selling price	120	80
Variable cost	69	40
Contribution margin	51	40
Pound per unit	5	2
Contribution margin per pound	10.2	20

Maximum price to be paid per pound = 6+10.20 = 16.20