Cane Company manufactures two products called Alpha and Beta that sell for $180 and $145, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 118,000 units of each product. Its average cost per unit for each product at this level of activity are given below: Alpha Beta
Direct materials $36 $24
Direct labor 32 27
Variable manufacturing overhead 19 17
Traceable fixed manufacturing overhead 27 30
Variable selling expenses 24 20
Common fixed expenses 27 22
Total cost per unit $165 $140
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.
1. Assume that Cane expects to produce and sell 107,000 Alphas during the current year. One of Cane's sales representatives has found a new customer who is willing to buy 22,000 additional Alphas for a price of $128 per unit; however pursuing this opportunity will decrease Alpha sales to regular customers by 11,000 units. What is the financial advantage (disadvantage) of accepting the new customer’s order?
2. Assume that Cane’s customers would buy a maximum of 92,000 units of Alpha and 72,000 units of Beta. Also assume that the company’s raw material available for production is limited to 300,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?
3. Assume that Cane’s customers would buy a maximum of 92,000 units of Alpha and 72,000 units of Beta. Also assume that the company’s raw material available for production is limited to 300,000 pounds. If Cane uses its 300,000 pounds of raw materials, up to how much should it be willing to pay per pound for additional raw materials?